Euro Pacific Brokers’ Cornerhttp://www.europac.com/research_analysis/commentaries/other
enThe Swamp Strikes Backhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/URJHhjzYbGU/swamp_strikes_back
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<div style="border-bottom:1px solid #ccc;margin-bottom:10px;padding-bottom:10px;color:#777;font-style:italic;">Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.</div> </div>
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John Browne </div>
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<span class="date-display-single">Wednesday, August 30, 2017</span> </div>
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<p>On August 21<sup>st</sup>&nbsp;many Americans witnessed the moon cast a historic but short-lived shadow across the United States. One day later, President Trump reversed his previously stated position on the 16 year old Afghan War, thereby eclipsing the possibility that the United States would finally come to its senses and rethink a failed strategy that is likely to fail for years, perhaps decades, to come. The abrupt change, in what had been a central plank in candidate Trump&rsquo;s appeal to voters thirsting for change in American foreign policy, came hard after the departure of Steve Bannon from the White House. As a self-avowed nationalist, Bannon had represented a true break in interventionist Republican thinking that had entangled the United States in intractable conflicts around the globe. To put an exclamation point, Sebastian Gorka, the last remaining proponent of the Bannon perspective, was forced out of the White House. The counter-revolution appears to be complete.&nbsp;</p>
<p>In his widely-followed speech regarding Afghan policy, Trump now appears to favor a widening of the military effort to insure that the United States continues to exert an influence on a remote central Asian region, where it is often said that empires go to die.</p>
<p>A big part of Trump&rsquo;s &ldquo;drain the swamp&rdquo; appeal, lay in his promise to change the politics of Washington. To many voters, such a shift would include a break from America&rsquo;s &ldquo;Neo-Con&rdquo; agenda of foreign intervention, which has deeply enmeshed the country in foreign politics and has enriched the defense industry and its&nbsp;lobbyists. However, given the Administration&rsquo;s failure to break the Congressional inertia with respect to healthcare and now its reversal on Afghanistan, it appears as if the swamp refuses to be drained.</p>
<p>Recent elections in the U.S. and Europe have exposed deep-seated public distrust, suspicion and anger at the political establishment. Most had expected that the 2016 Presidential election would be a test of established figures, but populist elements in both parties soon took center stage. Against almost all political calculations, Trump ousted Jeb Bush as the establishment Republican candidate and went on to win the Presidency.&nbsp; The political establishment was stunned, and has yet to come to terms with the people&rsquo;s choice. Now it appears that the entire establishment is united in a common aim to destroy the duly elected President.</p>
<p>The fact that business as usual now appears to be remaining so is manifesting itself with growing popular frustration. The past few days have seen an increase in politically motivated street violence in America. Meanwhile, the grass roots supporters of Sanders and Trump fight in the streets and on university campuses.</p>
<p>It appears that Bannon was squeezed out of the White House by establishment Republicans. In other&nbsp;words, the swamp swamped him, and America is just as stuck in Afghanistan as she ever was. While Trump may have insisted on better tactics, including increased aggression and more realistic rules of engagement, our servicemen and women will continue fighting a sixteen-year war on ground chosen by and favoring the enemy. Normally, history illustrates that given a determined enemy, and particularly one with sanctuary neighbors like Pakistan, even the largest armies lose. Such was the case in Vietnam.</p>
<p>The likelihood for real change in foreign policy has been mirrored by equal despair in the realm of healthcare. Based on the intransigence and hypocrisy of Congressional Republicans,&nbsp;and the failure of the Trump Administration to honestly and meaningfully grasp the policy details of healthcare, it appears as if the promise to repeal and replace Obamacare is now on life support, if not already dead on the table. It is starting to dawn on many Trump voters that effective deregulation and meaningful tax reform may&nbsp;vanish down the same rabbit hole.</p>
<p>It is become ever more probable that the United States will be left with increased government spending, ever greater public debts, and an expansion of identity politics and the welfare state. A stalling of enterprise, recession, and a fall in tax revenues&nbsp;may&nbsp;follow. America may&nbsp;resume the downward path carved by past Republican and Democrat politicians most markedly over the past half century.</p>
<p>If Government debt explodes, confidence in the U.S. economy and its dollar could fall, likely forcing interest rates to rise, possibly in the face of a recession. As hope for an enterprise revival fades, stock markets could stall and then fall dramatically.</p>
<p>But,&nbsp;currently, stock markets are heading for new highs, supported by oversize gains in biotech, transports and financials. Most likely these gains are based still on the blind hope that Republican and Democrat establishments will not succeed in sabotaging Trump&rsquo;s goals, including the repatriation of up to $5 trillion of U.S. corporate earnings marooned overseas, and cuts to the U.S. corporate income tax rates that would make U.S. corporations more competitive globally. If those initiatives disappear into the swamp, look for U.S. stocks to come under&nbsp;selling pressure.&nbsp;</p>
<p>Investors should concentrate hard on determining whether current ascendency of the establishment represents a skirmishing success or a major trendsetting victory. Regardless, Trump will continue to face resistance from Republican establishment leaders until he shows more determination to root out swamp personnel from the White House and from within his Administration.</p>
<p>Should Trump fail, Americans in his power base will feel betrayed, seriously disappointed and may&nbsp;take matters increasingly into their own hands on the streets. People from all sides, including those of allied nations, should fear such an outcome that now is poised menacingly to cast a dark and lasting shadow over America.</p>
<p>History shows that when the people hold their established politicians in open contempt and fight each other not with words in parliaments but with fists and weapons on the streets, as they did in the French and Russian Revolutions and in Weimar Germany, the results threaten democracy. Amazing as it may seem, this worrying specter now faces the United States.</p>
<p>For many Americans, Trump&rsquo;s election offered&nbsp;<em>hope -&nbsp;</em>that government would concentrate on defending the country, protecting citizens under the law, bringing immigration within the law, rebalancing trade deals and removing ensnaring regulations and crippling taxation. In the months following the election, the optimism fed into the markets and helped push stock prices up to record levels. As a Member of the English Parliament under Margaret Thatcher, I witnessed almost all these results at first hand. In particular, deregulation and lower tax rates triggered an economic renaissance and higher total tax revenues from increased earnings.</p>
<p>There can be little doubt that the American economy has declined markedly in recent years. But the truth has been kept from ordinary people by the surreptitious manipulation of key statistics such as inflation and employment figures and the massive deployment of fake money.</p>
<p>Ordinary Americans suffer falling living standards as the income gap continues to widen. They sense this as grossly unfair and blame correctly their establishment politicians who have feathered their own nests unashamedly. They are demanding change, and if it can&rsquo;t come through the democratic process, the results could be ugly.</p>
<p><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></p>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/URJHhjzYbGU" height="1" width="1" alt=""/>Wed, 30 Aug 2017 14:45:20 +0000europac admin20602 at http://www.europac.comhttp://www.europac.com/commentaries/swamp_strikes_backThe EU and Japan Move Closerhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/5e4266zrlZ8/eu_and_japan_move_closer
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<span class="date-display-single">Friday, July 14, 2017</span> </div>
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<p>Any news that emerged from last week&#39;s G-20&nbsp;Summit in Hamburg, Germany was bound to be overshadowed by the high theater of the first-ever meeting between U.S. President Trump and Russian President Vladimir Putin. As a result, the biggest actual development from the Summit garnered very little attention in the American media.&nbsp;In fact, it did not involve America at all.</p>
<p>On July 6<sup>th</sup>, the European Union and Japan announced a broad EU-Japan Economic Partnership Agreement.&nbsp;The fact that the agreement was presented at the time when&nbsp;world attention was focused on the G-20 can be viewed as a snub to President Trump,&nbsp;who has routinely disparaged these types of comprehensive deals. It also placed added pressure on Prime Minister Theresa May in the Brexit negotiations, as it was clearly meant to demonstrate what the UK will be missing if it leaves the Union. Politics aside, the deal could have a major impact on corporate strategy and earnings within the EU and Japan with effects ranging far into the global economy.</p>
<p>Last year, according to World Bank statistics, the U.S. GDP was some $18.6 trillion, comprising still marginally under a quarter of the world&rsquo;s economy.&nbsp;In aggregate,&nbsp;the&nbsp;EU was second with a GDP of $16.4 trillion. Japan is ranked fourth with $4.9 trillion. As a result of the potential close cooperation it envisions, this deal&nbsp;would&nbsp;create&nbsp;an economic bloc that would be larger than the U.S. economy.</p>
<p>During the cold war, the U.S. used military and economic pressure to establish clear leadership on the world stage and to curtail the spread of communism. The economic end of those efforts unquestionably resulted in some trade deals that offered foreign countries access to lucrative American consumer markets and negatively&nbsp;impacted some American businesses. On the campaign trail,&nbsp;Donald Trump was able to whip up widespread resentment against these deals, like the Iranian Nuclear deal, the Trans-Pacific Partnership Agreement (TPPA), and even the North American Free Trade&nbsp;Agreement&nbsp;(NAFTA),&nbsp;which just a few years ago was considered a success by both Democrats and Republicans. Trump even managed to characterize NATO itself, somewhat accurately, as a version of a bad trade deal for the U.S. He argued that the de facto defense subsidies that American taxpayers provide to NATO (we pay more towards the NATO budget than all other members combined), sacrifices U.S. economic interests for the sake of political leadership of dubious value.</p>
<p>President Trump was elected,&nbsp;promising to correct these perceived imbalances. He pulled out of the TPP negotiations, and has made some noise about renegotiating NAFTA. In May, President Trump called for NATO members to pay their &ldquo;fair share.&rdquo;&nbsp;The&nbsp;sharp change in tone from prior U.S. Presidents can probably be summed up best in German Chancellor Angela Merkel&rsquo;s much publicized statement&nbsp;during an election rally in Munich, saying &ldquo;The times&nbsp;in which&nbsp;we could completely depend on others are,&nbsp;to a certain extent, over,&hellip;We Europeans truly have to take our fate into our own hands.&rdquo;&nbsp;This is the lens&nbsp;through which we must view the EU&rsquo;s decision to fast track its negotiation with Japan.</p>
<p>To be fair, the EU-Japan trade block is not one of the world largest. In fact, Japan is the EU&rsquo;s seventh most important trading partner, according to 2015 figures of the European Commission Directorate-General for Trade.&nbsp;Furthermore, EU-Japanese trade has been relatively in balance, according to Bloomberg.&nbsp;These facts would argue that a deal&nbsp;between the EU&nbsp;with Japan was not particularly pressing.</p>
<p>However, the EU and Japan share many interests and suffer from some of the same economic headwinds. For some time Japan and the EU both experienced frustratingly slow growth. Their new proposed agreement may stimulate the growth that both sides sorely lack. In essence, custom duties of some $1.1 billion a year will be eradicated according to the EU Commission.&nbsp;While some tariffs will remain, the agreement will make Japanese technical requirements clearer and thereby easier for EU businesses to understand. It will allow increased European exports of foodstuffs, pharmaceuticals and medical devices. Meanwhile, giant Japanese auto manufacturers,&nbsp;like Honda and Toyota,&nbsp;will be allowed to penetrate EU markets more easily.&nbsp;Companies in these industries should benefit, especially once a final agreement has been signed and ratified. If successful, the proposed agreement likely will lower certain prices in the EU and Japan and put pressure on U.S. manufacturing competitors.</p>
<p>Furthermore, the fact that the agreement will cover data protection may present&nbsp;certain American technology giants, which&nbsp;favor the free storage and movement of data, with considerable difficulties.</p>
<p>Finalization of the agreement will require further complex negotiations. For example, automobiles face both manufacturing and safety standards. But as self-driving capabilities become ever more important in the industry, manufacturers will face computer data standards,&nbsp;which&nbsp;are considered services rather than manufactured products,&nbsp;which can be far more complex to negotiate.</p>
<p>Regardless, the eventual agreement has to be ratified by all 27 EU governments remaining after Brexit. The Belgian Walloon objections to the recent EU-Canada trade agreement illustrated just how uncertain can be the path towards EU ratification.</p>
<p>It is likely also that&nbsp;by announcing the agreement so publicly&nbsp;while it was still under negotiation, the EU had in mind to issue a rebuke to Prime Minister May for daring to ask to leave the EU and to intimidate her to soften her negotiating stance. Even as the EU&rsquo;s second largest contributor,&nbsp;May appeared to be ostracized publicly&nbsp;at the G-20 meeting with her only friend being President Trump. My advice to May would be to ignore these unsubtle prods and to stay the course to negotiate a clean and unambiguous exit.</p>
<p>Trade deals are extremely complex and are vital to long-term national wealth creation and even economic survival. They require very tough negotiations but,&nbsp;if successful,&nbsp;they can prevent potential trade wars from escalating into hot wars. While President Trump is right to put America&rsquo;s interests first and to cast a highly skeptical eye on our existing trade agreements, we should be careful not to find ourselves isolated on the world stage and to play catch&nbsp;up as the rest of the world formulates increasingly complex technology and industrial policies.</p>
<p><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></p>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/5e4266zrlZ8" height="1" width="1" alt=""/>Thu, 13 Jul 2017 20:28:44 +0000europac admin20355 at http://www.europac.comhttp://www.europac.com/commentaries/eu_and_japan_move_closerBritish Election Sends Shockwaves Felt Here and Abroadhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/mkS7-PCf3IM/british_election_sends_shockwaves_felt_here_and_abroad
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<span class="date-display-single">Thursday, June 15, 2017</span> </div>
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<div>Last week&rsquo;s General Election in the United Kingdom was a disaster for the new conservative government of Prime Minster Theresa May. Having called the unnecessary &ldquo;snap&rdquo; elections in order to strengthen her political hand, the result actually reduced the number of seats held by the conservatives and delivered large gains to the opposition Labour party, which had seemed in disarray just a few months ago. Although she has announced no plans to step down, her position has been severely weakened, possibly fatally. More pointedly, the UK&rsquo;s hand in negotiating favorable Brexit terms has eroded substantially. Besides creating significant ramifications for the European and global economy, the election also provides important lessons for the potential state of American politics.</div>
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<div>In my mind, four main reasons explain the election. The first and most important was May&rsquo;s crucial misreading of British voter sentiment. Like the surprise election of President Trump in November, last year&rsquo;s Brexit Referendum revealed how deep anti-establishment sentiment has become. May failed to sense that this sentiment had shifted to her government which was seen, rightly or wrongly, as responsible for the country&rsquo;s current malaise including low economic growth, mass immigration and local terrorism.</div>
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<div>Second, May displayed additional misjudgment when she suggested that health benefits for the elderly should be subjected to a &lsquo;means test&rsquo; that would withdraw benefits from those who were considered well off financially. (5/17/17, The Guardian, R. Mason, H. Stewart &amp; D. Campbell) This policy struck squarely at an important voting block at precisely the wrong time. Bumbled communications around the issue between the Prime Minister and Conservative Party allowed Labour leader Jeremy Corbyn to successfully label it a tax increase. May&rsquo;s eventual reversal on the issue made her look weak. Combined with her previously stating that she would not call a snap election, this lent credence to the rap song, &lsquo;Liar, liar&rsquo; which went viral on social media.</div>
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<div>Third, May underestimated how the youth vote had become a bigger factor in politics in the months since the Brexit referendum. Younger voters, who have been long cultivated by pro-EU propaganda, had nonetheless largely sat out last year&rsquo;s referendum, assuming that the &ldquo;remain&rdquo; camp would achieve an easy victory. (A similar dynamic depressed younger turnout in the U.S. when an easy Clinton win was assumed). The surprise outcome seems to have shocked that voting bloc out of its complacency. Young voters were further energized by Corbyn&rsquo;s promise of free education.</div>
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<div>On a more tactical level May proved to be a weak retail candidate. She declined to participate in a televised debate with other party leaders and instead appeared as a remote and strict schoolmistress. By adopting such a profile, she was clearly hoping to emulate Margaret Thatcher. But unlike the Iron Lady, May could not run on a record of stunning domestic and international achievements. On the other hand, Jerry Corbyn, who I knew in the House, is a natural &lsquo;people contact&rsquo; campaigner. On this occasion he excelled.</div>
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<div>The Conservatives in the UK are known for ruthless infighting, and clearly the knives have come out. May&rsquo;s former Cameron cabinet colleague, George Osborne, who she had previously discarded from her own administration, said last week that, &ldquo;Theresa May is a dead woman walking.&rdquo;</div>
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<div>However, in view of the party turmoil and the increased uncertainty surrounding the Brexit negotiations, due to start next week, it may be thought unwise to use these sharpened knives in the short term. On the other hand, a possible majority of anti-Brexit or Remainer backbench MPs could force a leadership challenge in the hopes of scuttling Brexit at birth.</div>
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<div>To counter this, May should consider enlisting the talents of the highly popular Nigel Farage by putting him in the House of Lords. As a leading Member of the European Parliament and the former head of UK Independence Party, which triggered and won the Brexit referendum, Farage knows the EU establishment better than almost anyone. He could assist greatly in the Brexit negotiations and help gain their acceptance in the Lords.</div>
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<div>But it cannot be denied that Great Britain&rsquo;s hand in the Brexit negotiations has been weakened severely. The trump card of walking away that May described as &ldquo;No deal is better than a bad deal&rdquo; in the event of continued outrageous EU demands to punish the UK is unlikely now to be approved by Parliament. This weakened hand likely will result in a so-called &lsquo;Soft Brexit&rsquo; with terms that keep the UK more firmly in the orbit of the EU.</div>
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<div>The &ldquo;Remainers&rdquo;, who opposed Brexit from the start, are now emboldened in their efforts to delay Brexit, in the hope that something will come along to defeat it. Already, they are talking of the UK remaining in the European Economic Area (EEA), a halfway membership of the EU.</div>
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<div>To retain a ruling majority, the Conservatives have had to make an alliance with the Northern Irish Democratic Unionist Party (DUP), which is known for its hard line against abortion and gay marriage, positions that the Conservatives have begun to moderate on in recent years. The DUP also favors a &lsquo;soft&rsquo; UK/EU border between Northern and Southern Ireland, a policy that is not supported by the Conservatives. On paper, the DUP might look like firm allies, but when May meets their MPs on June 13th, she is likely to have a mind-bending time. Retaining their vote throughout the, now, far more difficult Brexit negotiations will not be easy. Even when she succeeds, her overall majority will be only two!</div>
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<div>That the election disaster should occur just before President Trump&rsquo;s planned State Visit to the UK is another gift to Remainers. Doubtless, May had calculated that Trump&rsquo;s support for a Canada-plus trade agreement would strengthen greatly her Brexit negotiating hand. With the possibility that his personal rapport with May might end, Trump may prove less generous.</div>
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<div>During the election campaign, May complained of EU intervention. In this respect, on May 3, Business Insider reported that May had accused European Union officials of trying to influence the British elections, saying, &quot;All of these acts have been deliberately timed to affect the result of the UK general election ... .&quot;(5/3/17, Business Insider,&nbsp;Adam Bienkov) Last Sunday, the Observer released a report, citing an EU source, saying, &quot;It is understood that [EU Commission President, Jean-Claude] Juncker had advised May to call an early general election ... .&quot; (6/11/17, Business Insider, Will Martin)What did he know that May did not?
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<div>This all portends a period of great uncertainty that can create difficult conditions for businesses and financial markets. In the short-term, a weakened Pound Sterling likely will shield a potential fall in exports and keep financial markets relatively calm. On the other hand, there is growing evidence that the fall in the currency in recent months has done little on that front. In the medium term, the Brexit negotiations, likely amplified by pro-EU leaks, are likely to cause heightened volatility in which the Remainers and their allies in the media are likely to incite further damage to May&rsquo;s negotiating hand. Parliamentary support was always going to be difficult, especially from the House of Lords, which is dominated by Remainer Life Peers. This potential parliamentary hurdle was perhaps the main factor that tempted May to call the snap election in the first place.</div>
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<div>Long-term implications will depend upon the final Brexit result. If the negotiations go badly for May, it will mean that the UK will be forced to maintain relatively open borders and will not be freed from EU funding obligations. Potentially closer bi-lateral trade agreements between the US and the UK will be that much harder to achieve.</div>
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<div>Most importantly, the result shows how quickly political pendulums can swing. Republicans should take notice that unless better communication and coordination is achieved with the White House, then midterm elections in 2018 could deliver one, or both, chambers of Congress to Democrats. Proceed with caution.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/mkS7-PCf3IM" height="1" width="1" alt=""/>Thu, 15 Jun 2017 08:54:23 +0000europac admin20209 at http://www.europac.comhttp://www.europac.com/commentaries/british_election_sends_shockwaves_felt_here_and_abroadIn Defense of Trumpian Diplomacyhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/VQimLSRsiTo/defense_trumpian_diplomacy
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<span class="date-display-single">Friday, June 2, 2017</span> </div>
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<p>Given the media&rsquo;s obsession with some of the President Trump&rsquo;s communication challenges, it was utterly predictable that the President&rsquo;s declaration that his trip to Europe and the Middle East should be considered a &ldquo;home run&rdquo; was met almost universally with ridicule. In truth, the President actually did accomplish a series of victories overseas, or at least laid important groundwork that should help advance American interests in ways that prior Administrations have failed to do. It&rsquo;s a shame that these developments have been ignored among the din of partisanship.</p>
<p>From my perspective President Trump reasserted American leadership in the primary security challenge of our day, namely the defeat of radical Islamic terrorism. He also struck deals that could prove financial windfalls to U.S. industry. The President ran on security and prosperity and that was precisely the thrust of the trip.</p>
<p>Trump&rsquo;s first stop was Saudi Arabia, the keeper of the most holy places in Islam, the most influential of the Sunni Arab states and the one with whom America has long enjoyed close relations. Over the previous eight years Sunni Arabs had been increasingly dismayed by the Obama Administration&rsquo;s tilt towards friendship with Shiite Iran and her allies. (This change resulted in the Iran Nuclear Treaty which is widely despised among Sunnis.)&nbsp;Given that some had concluded that Trump had won the presidency on in part through anti-Islam rhetoric, his meetings in Saudi Arabia should do much to quell anxiety in America&rsquo;s most important Islamic allies.</p>
<p>Possibly even of more significance was King Salman&rsquo;s invitation to Trump to address the leaders of 50 Sunni Arab states, something never done before by a U.S. President. In his speech the President offered traditional American leadership, but in return demanded cooperation in the ideological battle with radical Islam. He exhorted Arab leaders to &ldquo;Drive them out. Drive them out of your places of worship &hellip; your communities &hellip; your holy land &hellip; out of this earth.&rdquo;</p>
<p>To achieve this he announced the opening of the new Global Center for Combatting Extremist Ideology to be located symbolically in Saudi Arabia. He assured his audience that while &ldquo;America seeks peace&mdash;not war. &hellip; Our friends will never question our support and our enemies will never doubt out determination.&rdquo;&nbsp;If any doubted Trump&rsquo;s conviction, his ordering of a 59 Tomahawk Cruise missile strike into Syria on April 6<sup>th</sup>&nbsp;and the dropping of the CBU 43/B &lsquo;Mother Of all Bombs&rsquo; in Afghanistan on April 14<sup>th</sup>,&nbsp;proved the determination of his words. All 50 national leaders signed an agreement designed to starve ISIS of international funds. This is an achievement that the mainstream press has bent over backwards to ignore.</p>
<p>But the biggest take away from Saudi Arabia may be financial. The Saudis agreed to a $100 billion arms purchase from the U.S. and a $400 billion joint investment in oil, gas, and high technology.&nbsp;Many have concluded that these deals could lead to the creation of hundreds of thousands of jobs in the U.S.</p>
<p>With positive accolades from the Saudis, Trump went to Israel for meetings with Prime Minister Netanyahu. While the President did not make any mention of a &lsquo;two-state&rsquo; solution, the message was clear that Trump felt very positive that a long sought peace deal was possible between the Israelis and the Palestinians. Furthermore, in what appeared to be very friendly and positive meetings, he assured Israelis that America would &ldquo;&hellip;never, ever allow Iran to possess a nuclear weapon.&rdquo;</p>
<p>The most significant portion of the trip came when the President landed in Brussels for meetings with NATO leaders, who collectively represent America&rsquo;s most vital allies. After a campaign in which candidate Trump famously asserted the obsolescence of the Post-war NATO alliance, the majority of the leaders in attendance were convinced that as President he would move past campaign rhetoric to adopt the pragmatism typical of American presidents. As such, it was expected that Trump would re-affirm the United States&rsquo; commitment to Article 5 of the NATO Treaty (that assures mutual defense if any single NATO member nation is subjected to outside attack).</p>
<p>To their dismay, Trump conspicuously failed to do so. This omission elicited palpitations on both sides of the Atlantic and caused many to conclude that the Western alliance had been permanently fractured and that the Russians had achieved their long awaited strategic triumph. This conclusion is laughably premature.&nbsp;</p>
<p>As an accomplished business negotiator, Trump knows that it is unwise to fold one&rsquo;s cards while the hand is still in play. His real goal here is not to abandon Western Europe to the perils of Russian expansion but to compel wealthy European countries to finally pay for a commensurate portion of their own defense. For years many of these countries have spent far less than the 2% of GDP on defense as NATO membership requires. The neglect has been easy to make when these governments could be assured that a muscular Uncle Sam would always ride to the rescue regardless. As the old saying goes, &ldquo;Why buy the cow when you get the milk for free?&rdquo;</p>
<p>Undoubtedly Trump sought to create the &lsquo;leverage of fear&rsquo; to force the cooperation of reluctant NATO leaders in meeting their defense spending targets. Following the initial shock, Trump&rsquo;s attack appeared to have positive results. By the close of the NATO and subsequent G-7 meetings, many national leaders, including France&rsquo;s new President Macron, who dined privately with Trump, appeared to agree that NATO must meet its defense spending commitments.</p>
<p>Trump also appears to have been successful in pushing the NATO allies in committing more resources in the fight against international Islamic terrorism. While ISIS has not yet been able to deploy weapons of mass destruction, it has instead been able to utilize a substitute: the weapon of mass immigration. It is likely that hundreds of ISIS cells live within NATO countries, where Muslims already have been given preferential treatment under local laws. The disgustingly barbaric ISIS attack in Manchester was mentioned repeatedly by Trump as a contemporary event in order to drive home the ever increasing, ever broadening global threat of ISIS. The Manchester attack may help stiffen the backs of NATO leaders in taking resolute anti-terrorist measures, including not merely watching but deporting known radical suspects. Again, it supported Trump&rsquo;s long held stance on illegal immigration.</p>
<p>In the aftermath of the trip many have cited Chancellor Merkel&rsquo;s remark that Europe must be more self-reliant as evidence of Trump&rsquo;s failure as a world leader. But for those who have long believed the Translantic status-quo as both inequitable and inefficient, her admission may very well be a sign of his success.&nbsp;&nbsp;&nbsp;</p>
<p>The President&rsquo;s trip can be viewed as the initial step of first isolating and then possibly forming a massive military U.S. led coalition of Sunni Arabs, Israel and NATO to defeat ISIS, while leaving Shite Iran and its nuclear treaty to be dealt with later. Trump&rsquo;s inaugural overseas trip could well result in a positive effect on world trade, job creation and economic growth. Coupled with the prospect of greatly increased defense expenditure, equities should benefit.</p>
<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/VQimLSRsiTo" height="1" width="1" alt=""/>Fri, 02 Jun 2017 14:01:38 +0000europac admin20145 at http://www.europac.comhttp://www.europac.com/commentaries/defense_trumpian_diplomacyThe Case for Socialized Medicinehttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/H09Fpaw570Y/case_socialized_medicine
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<span class="date-display-single">Thursday, March 30, 2017</span> </div>
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<div>Last week the American political establishment was shaken to its foundation when the Republican Party leadership withdrew the American Health Care Act (AHCA) just before the vote was to be taken on the floor of the House of Representatives. Besides being a most unusual procedure, it exposed a fundamental split in the country,reflected not merely in Congress but within the Republican Party. GOP purists, represented by the House Freedom Caucus, demanded more significant roll backs in socialized medicine that were contained in the Ryan plan. Their refusal to back the plan, after years of promising complete repeal, doomed the bill.</div>
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<div>Given the political and popular landscape, the legislative fiasco should cast serious doubt that Washington will ever be able to take any meaningful steps to roll back government involvement in health care. Although widely considered a failure of design and execution, Obamacare seems to have succeeded in one important mission: It has created an even greater dependency on government in the health care marketplace. Getting government out is now much more difficult than it was just eight years ago. This may have been the democrats&rsquo; plan from the start. As a result, the choice conservatives now face is to embrace an increasingly complex, cumbersome, and inefficient public/private hybrid system, or to acknowledge the political reality and make the most palatable lemonade they can from the lemons that are available. Believe it or not, that may argue for a deeper embrace of socialized medicine.</div>
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<div>Contrary to the current rhetoric,&nbsp;Obamacare was not in fact America&rsquo;s first foray into socialized medicine and it did not represent the kind of crossed Rubicon that Republicans like to accuse it of being.&nbsp;The door had first been opened in the Second World War when government imposed wage controls that gave incentives to employers to bundle health insurance into compensation packages.(1)&nbsp;When the government then made employer-provided insurance tax deductible to employers and tax free to employees, such plans became the norm. But the government really charged into the market&nbsp;in 1965 with the creation of Medicare and Medicaid.&nbsp;For many years, Republicans have had to twist themselves into logical pretzels in order to argue that Obamacare is socialism while Medicare is not.</div>
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<div>In granting a brand new entitlement,&nbsp;Obamacare did nothing to address the problems that have plagued the U.S. health care system for decades. It did not encourage competition among insurers, it demanded a &ldquo;one size fits all&rdquo; approach to coverage, and most egregiously did nothing to contain the rising medical costs that threaten to bankrupt the nation. To add insult to injury, it required that people buy insurance that they really didn&rsquo;t want.</div>
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<div>Although the&nbsp;Ryan plan&nbsp;removed the obligation of individuals to buy coverage,&nbsp;it made many of Obamacare&rsquo;s shortcomings worse. It left pre-existing condition requirements in place, which&nbsp;would&nbsp;guarantee that premiums and deductibles would&nbsp;continue to rise. It did not relax the state restrictions on insurance competition, nor did it seek to contain medical costs. In other words, the Ryan plan would have put Republicans on the same hook from which the Democrats are now hanging. The alternative of a repeal without a replacement, so much wished for by the hard right, would have created the kind of political chaos that would virtually guarantee a Republican massacre in 2018 and 2020.</div>
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<div>However, Republicans may still, for now, be able to lay claim as the party of fiscal responsibility. And as a result, I would suggest a basic cost-benefit analysis. It is clear from almost any standpoint that the socialized health care available in other developed nations like the UK, Canada and the 34 developed free market economies of the Organization for Economic Co-operation and Development (OECD) delivers health care more efficiently than in the U.S.</div>
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<div>In October 2012, PBS Newshour reported the U.S. as the world leader in cancer treatment and health&nbsp;care research. Given our private wealth and the strength of our university hospitals, this should come as no surprise. But what we have gained in high end coverage, we have lost in everyday care. The same report mentioned that there are only 2.4 practicing doctors and 2.6 hospital beds per thousand people, which is far below the OECD averages of 3.1 and 3.4 respectively. In addition, the American life expectancy is 78.7 years, in 2010, versus the OECD average of 79.8 years.&nbsp;(Jason Kane, 10/22/12)</div>
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<div>The World Bank reports that, in 2014, the U.S. spent 17.1% of GDP or $9,403 per person on health care.&nbsp;The UK spent 9.1% of GDP or $3,935 per head; Canada 10.4% or $5,292; the EU 10.0% or $3,613&rsquo;. In 2000, despite spending approximately twice the amount per head of any other nation, or group average of nations, the World Health Organization rated the U.S. health system at only 37<sup>th</sup>, Canada 30<sup>th</sup>, and the UK 18<sup>th&nbsp;</sup>out of 191 nations.&nbsp;(WHO Global Health Expenditure Database) Clearly, we are not getting what we think we are paying for.</div>
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<div>Many OECD countries like the UK and Canada have what is termed a &lsquo;single payer&rsquo; system sponsored by the state. In the UK, this means that the National Health Service provides basic &lsquo;bangers and mash&rsquo; coverage which includes provisions for prior conditions and catastrophic illness. Yes, wait times to see a physician for non-acute conditions are generally longer than in the U.S., but the bureaucratic process of paying through insurance, with its never-ending forms, co-pays, deductibles, and network providers, is largely absent.</div>
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<div>In the UK, a thriving private health system that provides higher end &lsquo;roast grouse and souffl&eacute;&rsquo; services runs alongside the &ldquo;bangers and mash&rdquo; state system. This means that wealthy people with access to greater resources can still seek care above and beyond what is available through the state. But since the level of base care is widely regarded as adequate, the two-tiered system does not generate significant class resentment.</div>
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<div>Furthermore,&nbsp;this system allows top specialists to continue serving in the public system while supplementing their low state income with the higher fees paid in their private practices. And while doctors in the UK generally make less than their U.S. counterparts, they are also free of the crushing malpractice insurance which tends to be a great equalizer.</div>
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<div>I have lived for long periods of my life in the UK and the US, I have had a good deal of exposure to the two health care systems. And while both offer mixtures of public and private care, the UK&rsquo;s is much closer to the type of socialized medicine that has long been the goal of the American left. I have always considered myself a conservative but the UK system seems&nbsp;preferable to the monstrosity that has been created by Washington sausage making.</div>
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<div>Of course any state system would involve rationing on some level. But if such guidelines are developed democratically, public acceptance of such limits can be achieved. By acquiescing to a move towards a single payer system, Republicans would be in a strong position to ensure that cost containment would be a priority. In that sense, conservatives could potentially strike at the root of the health care problem: The inexorable rise in costs and the crushing burden that health care currently places on the economy. Currently,&nbsp;the push for socialized medicine has been the province of the Democrats, with the primary energy coming from the extreme left figures such as Bernie Sanders and Elizabeth Warren. The worst scenario for health care would be to allow such big spenders and class warriors to set the agenda.</div>
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<div>Given that many countries have succeeded in providing better overall health care outcomes with universal coverage and at far less cost, it should not be too much of a stretch for Congress to take the final step and accept an extension of Medicare to all. Of course,&nbsp;taxes would have to increase to pay for it, but citizens and businesses would no longer have to pay for insurance themselves. If the cost of health care can be brought down, the net result is less money for health care and more for everything else.</div>
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<div>I have never been a fan of socialized anything. But in the modern world of instantly diffused outrage and the increasing frustration with a health care system that is clearly dysfunctional, Republicans should recognize the political reality and seize the initiative. A soberly devised plan could vastly streamline health care delivery, minimize waste, control costs, provide basic care for all, and perhaps even deal a harsh blow to tort lawyers. Moderate Democrats would jump on board in droves and President Trump and the Republican Congress could emerge as winners.</div>
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<div>Observers should not count President Trump as down. He has a reputation for coming back. He may recognize a political winner when he sees it and look to ditch the ideological baggage of his own party. Trump was not put into office by card carrying conservatives but by middle class populists who would support anything that makes their lives less anxious.</div>
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<div>I believe that&nbsp;private enterprise always delivers higher quality and lower prices than government. This is true for goods and services and it also would be true for health care if the markets were allowed to function freely (which they have not). But voters today do not perceive health care as a good or a service, but as a right. Conservatives can argue this point, but they will lose the emotional battle, which is where this fight will occur.</div>
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<div>(1)&nbsp;- BERDINE, Gilbert. Supply and Demand: Government Interference with the Unhampered Market in U.S. Health Care.&nbsp;<strong>The Southwest Respiratory and Critical Care Chronicles</strong>, [S.l.], v. 2, n. 7, p. 21-24, july 2014. ISSN 2325-9205. Available at: &lt;<a href="https://mailct.europac.net/owa/redir.aspx?SURL=t1Ba0At28QJ6INNGL3jkRAnSnx1-bOYIsRbRxfLAaQfj__3FenfUCGgAdAB0AHAAOgAvAC8AcAB1AGwAbQBvAG4AYQByAHkAYwBoAHIAbwBuAGkAYwBsAGUAcwAuAGMAbwBtAC8AaQBuAGQAZQB4AC4AcABoAHAALwBwAHUAbABtAG8AbgBhAHIAeQBjAGgAcgBvAG4AaQBjAGwAZQBzAC8AYQByAHQAaQBjAGwAZQAvAHYAaQBlAHcALwAxADQAMwAvADMANQAzAA..&amp;URL=http%3a%2f%2fpulmonarychronicles.com%2findex.php%2fpulmonarychronicles%2farticle%2fview%2f143%2f353" target="_blank">http://pulmonarychronicles.com/index.php/pulmonarychronicles/article/view/143/353</a>&gt;. Date accessed: 29 mar. 2017.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/H09Fpaw570Y" height="1" width="1" alt=""/>Thu, 30 Mar 2017 14:45:05 +0000europac admin19810 at http://www.europac.comhttp://www.europac.com/commentaries/case_socialized_medicineBritain Needs Trump for Smooth Brexithttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/Dx2Z7UvK1J8/britain_needs_trump_smooth_brexit
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<span class="date-display-single">Tuesday, January 31, 2017</span> </div>
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<div>At the Washington joint press conference with Prime Minister May held on January 27th, President Trump told the watching world, &ldquo;Brexit is going to be a wonderful thing.&rdquo;&nbsp;The meeting did much to clear the way for Britain to stand alone and enter trade with the United States without the European Union (EU). Their talk of a U.S.&mdash;UK free trade agreement could do much to ease the fears of some key English Members of Parliament and counterbalances the fears that Britain will be punished by a bitter EU. The positive meeting occurred at a fortuitous moment. Only four days prior, the UK&rsquo;s Supreme Court had ruled that Parliamentary approval must be specifically obtained before Her Majesty&rsquo;s Government can sign trigger negotiations to exit the EU.</div>
<div>&nbsp;</div>
<div>May&rsquo;s speech to Republican Members of Congress on January 26<sup>th</sup>&nbsp;and her responses at the joint press conference made it clear that there were three central strategic aims for her visit. The first was to re-establish the &lsquo;Special Relationship&rsquo; which had been downgraded deliberately under Obama to the disadvantage of both countries. First coined by Winston Churchill in 1946, The term &ldquo;Special Relationship&rdquo; grew from the countries&rsquo; shared culture and implied the closest economic, political, diplomatic and military cooperation. The President&rsquo;s reference to it as the &ldquo;<em>Most&nbsp;</em>Special Relationship&rdquo; together with his immediate acceptance of an invitation to make a State visit to Britain this year should keep the momentum.</div>
<div>&nbsp;</div>
<div>Second, May wanted Trump&rsquo;s expressed reassurance that he was not intending to abandon NATO but to strengthen it by ensuring that all members abide by their agreed defense spending and force levels. In addition, May suggested calls for a NATO commitment to fight terrorism and cyber warfare.&nbsp;Trump affirmed her position readily. This will reassure many European nations, most importantly Germany.</div>
<div>&nbsp;</div>
<div>May&rsquo;s third and most difficult goal was to achieve Trump&rsquo;s commitment to a free trade agreement between the UK and the United States, similar to that enjoyed by Canada. Whether promised unofficially or in letters of intent, an agreement would play a potentially crucial part in May&rsquo;s negotiation of a soft Brexit.&nbsp;At present, the EU appears motivated to punish Great Britain for its audacity to leave and to force a so-called &lsquo;hard&rsquo; Brexit. Such an outcome for the UK could dissuade other wavering nations like Greece, Italy and even France to follow suit. Being able to show that the UK has already a potential free trade agreement and an enhanced relationship with the U.S. might persuade the EU to accept a &ldquo;soft&rdquo; Brexit.</div>
<div>&nbsp;</div>
<div>The sticking point for the UK to maintain continued access to the EU market, could hinge on British acceptance of free flow of people through its borders, including potentially millions of Muslim immigrants. But control of national borders was a key element in the Brexit vote. Therefore, May must strengthen her hand so the EU is forced to accept a more reasonable deal, hence the crucial value of a potential trade deal with the U.S.</div>
<div>&nbsp;</div>
<div>Trade negotiations involve complex trade-off bargains on many strategic issues. They are particularly difficult when negotiated between nations like the U.S. and UK that&nbsp;have similar economies and important domestic vested interests. For instance, London and New York have struggled against one another to become the world&rsquo;s dominant financial center. But as long as Britain remains in the EU, its ability to negotiate bi-lateral trade agreements will remain curtailed. However, if May could obtain a confidential and undisclosed commitment in advance, it would strengthen her hand greatly in bargaining with the EU. Some believe that due to the complexity and the time necessary such a clandestine provisional treaty never could be achieved. However, Trump is a renowned dealmaker, and as we have seen, he can deliver when needed.</div>
<div>&nbsp;</div>
<div>Had former Prime Minister Cameron not felt so overly confident of victory, doubtless he would have thought to include provisions for a Parliamentary Bill that would follow an Exit outcome of the Referendum, thereby avoiding the embarrassing confusion that exists now. He should have made clear that the referendum result would be binding on Parliament, and what, if any, role Parliament was to play in the negotiations with the EU. The result of this gross oversight is that Prime Minister May, who voted &lsquo;Remain&rsquo;, inherited a mess. It is a mark of her integrity, skill and courage that despite powerful countervailing forces, she intends to respect the expressed will of the people.</div>
<div>&nbsp;</div>
<div>Doubtless, May is relieved that the UK&rsquo;s Supreme Court found expressly that she would not have to consult the devolved national Assemblies of the UK (Scotland, Wales, etc.), all of which are against Brexit.&nbsp;However, she won&rsquo;t find much more sympathy in Parliament where some 74 percent of her own&nbsp;party in the House of Commons and a majority of Peers&nbsp;in the House of Lords hold Remain sympathies. However, 61 percent of constituencies voted for Brexit.&nbsp;(Jemima Kelly &amp; Patrick Graham, Reuters, 11/3/16)&nbsp;Likely, only foolhardy Commons Members will defy their powerful party whips to vote against their constituencies and the general electorate so soon after a referendum.&nbsp;This will be true especially if May adds more pressure by making it a vote of confidence which, if lost, would trigger an immediate general election. As for the Lords, May can threaten to reduce further their already limited undemocratic powers. Therefore, May likely will sign the EU&rsquo;s Article 50, triggering Brexit, at the end of March, setting in motion negotiations that could last up to two years.</div>
<div>&nbsp;</div>
<div>During this extended period of uncertainty in the UK, investors could expect considerable turbulence in almost all asset classes. But if a soft Brexit can be achieved, and should a U.S.&mdash;UK trade agreement follow soon afterwards, UK equities, especially those involved in U.S., Japanese and Chinese trade,&nbsp;could&nbsp;rise. Investors should start having their advisors research which companies may stand to benefit,&nbsp;particularly in the fields of finance, agriculture and defense.</div>
<div>&nbsp;</div>
<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/Dx2Z7UvK1J8" height="1" width="1" alt=""/>Tue, 31 Jan 2017 18:49:05 +0000europac admin19507 at http://www.europac.comhttp://www.europac.com/commentaries/britain_needs_trump_smooth_brexitItaly’s Bank Rescue Foreshadows Nationalization of More EU Bankshttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/71JiRXcrM_I/italy%E2%80%99s_bank_rescue_foreshadows_nationalization_more_eu_banks_0
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<div style="border-bottom:1px solid #ccc;margin-bottom:10px;padding-bottom:10px;color:#777;font-style:italic;">Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.</div> </div>
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<span class="date-display-single">Wednesday, January 25, 2017</span> </div>
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<div>On December 7, 2016, Italy&rsquo;s Prime Minister Matteo Renzi resigned following defeat in a national referendum, that he had supported, that would have changed the country&rsquo;s parliamentary system. The development, which represents just the latest sign of anti-EU sentiment spreading throughout Europe, was felt acutely by Italy&rsquo;s troubled banking sector. In particular, the Banca Monte dei Paschi di Siena (MdP) has been teetering&nbsp;on the brink of collapse and now may stand as a case study that may be encountered by other EU member nations.</div>
<div>&nbsp;</div>
<div>The advent of the euro currency allowed Eurozone member countries, even those with poor financial health like Italy, to borrow at far lower &lsquo;Germanic&rsquo; interest rates than their respective national credit ratings would have allowed. In turn, national borrowers were able to tap into the vast sums of liquidity created under central bank quantitative easing (QE) programs at astonishingly low, and sometimes negative, interest rates. Predictably this has led to a massive misallocation of capital, and billions in potentially non-performing loans.</div>
<div>&nbsp;</div>
<div>The problem for Italian banks became particularly acute when the fall of the Renzi government raised the possibility that a new Government could seek to lead Italy out of the Union and bring back the lira to Italy. With the return of its own currency, future Italian governments could devalue at will in order to pay the country&rsquo;smounting debts.&nbsp;If faced with the possibility that their euro-denominated deposits could be transformed into shrinking lira deposits some could be convinced to transfer funds into German banks&nbsp;where they&nbsp;would&nbsp;face&nbsp;no such peril (EU laws present no obstacles to cross-border banking). This is a clear recipe for a banking default.</div>
<div>&nbsp;</div>
<div>According to a 2016 IMF working paper (WP16135), Italian bank nonperforming loans had tripled&nbsp;since the crisis of 2008. It blamed &ldquo;A combination of over-indebted corporates following the sharp crisis-related drop in output, banks generally low in capital buffers, a highly complex legal system of corporate restructuring and insolvency, lengthy judicial processes and a tax system that until recently discouraged NPL write-offs &hellip; .&rdquo;&nbsp; On September 13th, Bloomberg estimated Italy&rsquo;s nonperforming loans at $394 billion&nbsp;through March&nbsp;or 16.1 percent of Europe&rsquo;s total,&nbsp;based on data from the European Central Bank (ECB).</div>
<div>&nbsp;</div>
<div>Furthermore, a relative lack of economic opportunity and a massive increase in inward migration has caused a marked increase in emigration from Italy, particularly among young males. The recently released OECD 2016 International Migration Outlook recognizes that, &ldquo;The public is losing faith in the capacity of governments to manage migration.&rdquo;&nbsp;Italian emigration more than doubled between 2010 and 2014. This contributed to an erosion of the bank deposit base.</div>
<div>&nbsp;</div>
<div>Italy is one of the world&rsquo;s most indebted nations with debts estimated in 2015 at over $2.4 trillion or 130 percent of its GDP, about half of which is comprised of government spending. Therefore, Italy is not well placed to finance a potentially devastating and fast developing domestic banking crisis.</div>
<div>&nbsp;</div>
<div>In the U.S. banking crisis of 2007/8, our government reacted quickly to a potential international financial meltdown by organizing the Troubled Asset Relief Program (TARP) to purchase &lsquo;toxic&rsquo; assets from banks bailed-out with taxpayer funds. Politically, it was highly unpopular. In Europe&rsquo;s case, influenced largely by Germany&rsquo;s unwillingness to make its citizens liable for foreign banks, the EU and Eurozone chose to leave its&nbsp;banks unaided while toxic or non-performing loans continued to fester. The EU&rsquo;s article 32 provides that equity and bondholders suffer financial loss before national governments are permitted to deploy taxpayer funds. It is a policy first developed by the EU, in conjunction with the IMF and ECB, in the rescue of Cypriot banks in 2015 when even certain large depositors&rsquo; funds were seized to make the banks whole. It was termed a &lsquo;bail-in&rsquo;<em>.</em></div>
<div>&nbsp;</div>
<div>MdP is a relatively small bank. As of June 30, 2016, its assets came in at just $182.9 billion, ranking the bank at only 121<sup>st</sup>&nbsp;largest internationally (<a href="https://mailct.europac.net/owa/redir.aspx?SURL=DzcWZq6GOmj2nY2gAMxPC0sDGxQ-np9yieMT6J8xKa9W2ddzX0XUCGgAdAB0AHAAOgAvAC8AdwB3AHcALgByAGUAbABiAGEAbgBrAHMALgBjAG8AbQA.&amp;URL=http%3a%2f%2fwww.relbanks.com" target="_blank">www.relbanks.com</a>). Regardless, the news of its potential collapse sent shock waves through Italy&rsquo;s banking community. However, the crisis does not appear to be contained (as they never are). Italy&rsquo;s second largest bank, UniCredit, S.p.A, with a deposit base of almost $1 trillion,&nbsp;has also come under intense scrutiny. But the larger bank was able to gain shareholder approval for a 10:1 reverse share split and a rights issue that raised some $13.8 billion of new capital.&nbsp;The combination met the demands of Article 32 of the EU Directive for a bail-in. It may have restored confidence sufficiently to ensure survival, for a time at least, without government intervention.</div>
<div>&nbsp;</div>
<div>The case of Monte dei Paschi was very different. The bank had waited until December 21<sup>st</sup>&nbsp;to declare that it had sufficient liquidity to last only four months. The shareholders of Monte dei Paschi,&nbsp;by the close of 2016 had experienced&nbsp;a&nbsp;large fall in&nbsp;earnings per share&nbsp;(EPS)&nbsp;and an&nbsp;almost complete collapse&nbsp;in the share price for the year.</div>
<div>&nbsp;</div>
<div>To make matters worse, like mortgage-backed securities that were distributed by Wall Street in the early 2000&rsquo;s, junior bonds in Italian banks were sold to risk averse retail investors as &lsquo;sound banking investments&rsquo;.&nbsp;The degree to which rank and file investors are exposed to the bank has made the case a politically charged issue.</div>
<div>&nbsp;</div>
<div>On December 21, 2016, Italy&rsquo;s finance minister, Piercarlo Padoan, implored his Parliament for rescue funds. Posturing that the Italian banking system was &ldquo;solid and healthy&rdquo;, he nevertheless urged adoption of government restructuring plans so that banks could&nbsp;&nbsp; &ldquo;&hellip; travel on their own legs, be profitable,&nbsp;and finance the economy.&rdquo;&nbsp;Later that day, the Italian Parliament approved a bank bail-out package of $20.8&nbsp;billion.&nbsp;However, Goldman Sachs had estimated earlier that almost $40 billion would be needed to ensure long term survival.&nbsp;(Financial Times, R. Sanderson, J. Politi, M. Arnold, 12/21/16)&nbsp;A London analyst had forecast even more.</div>
<div>&nbsp;</div>
<div>The range and conflicting data surrounding the bank&rsquo;s rescue make it unlikely the real amount necessary to halt the escalating Italian banking crisis is known or can be known any time soon. In today&rsquo;s highly interconnected financial world, Italy&rsquo;s banking problems are not restricted to Italy or even to the European Union. Estimates are that French, German, Japanese, Spanish, UK and U.S. banks are exposed to the debts of Italian banks approaching half a trillion dollars.</div>
<div>&nbsp;</div>
<div>Important general elections are due this year in France, The Netherlands, Germany and, owing to the failed Italian referendum, in Italy. In addition, Brexit has set a precedent in the minds of the European public that it is possible to escape the clutches of the EU. Also, should the UK succeed in leaving, the EU will lose its second largest economy and financial contributor. Doubtless, this potential erosion of EU funding and the recently exposed possibility of democratic &lsquo;revolution&rsquo; will act to focus the minds of the EU&rsquo;s bureaucracy increasingly on finding a political solution to Italy&rsquo;s banking woes.</div>
<div>&nbsp;</div>
<div>In aggregate, the problem facing certain European banks is so enormous that even bail-ins could prove politically untenable. A temporary stopgap could be an interim nationalization of Italian and perhaps other European banks. It might dawn gradually on politicians, bankers and even investors as a means of averting a financial and monetary meltdown and thereby help to secure unity within the EU. Furthermore, nationalization would save the banks and their depositors while, at the same time, allowing for much needed banking reforms and a return to more prudent lending practices. The recent rise in Italian bank share prices may indicate this view is gaining credence.</div>
<div>&nbsp;</div>
<div>In conjunction with the current &lsquo;war on cash&rsquo; and the growing pressure to initiate a global taxation system, bank nationalizations undoubtedly would mean a significant government intrusion into citizens&rsquo; cash and therefore over citizens&rsquo; lives, a major forward step in the globalist agenda.</div>
<div>&nbsp;</div>
<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/71JiRXcrM_I" height="1" width="1" alt=""/>Wed, 25 Jan 2017 20:56:02 +0000europac admin19476 at http://www.europac.comhttp://www.europac.com/commentaries/italy%E2%80%99s_bank_rescue_foreshadows_nationalization_more_eu_banks_0Italy’s Bank Rescue Foreshadows Nationalization of More EU Bankshttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/sAkYFI2sue0/italy%E2%80%99s_bank_rescue_foreshadows_nationalization_more_eu_banks
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<span class="date-display-single">Wednesday, January 25, 2017</span> </div>
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<div>On December 7, 2016, Italy&rsquo;s Prime Minister Matteo Renzi resigned following defeat in a national referendum, that he had supported, that would have changed the country&rsquo;s parliamentary system. The development, which represents just the latest sign of anti-EU sentiment spreading throughout Europe, was felt acutely by Italy&rsquo;s troubled banking sector. In particular, the Banca Monte dei Paschi di Siena (MdP) has been teetering&nbsp;on the brink of collapse and now may stand as a case study that may be encountered by other EU member nations.</div>
<div>&nbsp;</div>
<div>The advent of the euro currency allowed Eurozone member countries, even those with poor financial health like Italy, to borrow at far lower &lsquo;Germanic&rsquo; interest rates than their respective national credit ratings would have allowed. In turn, national borrowers were able to tap into the vast sums of liquidity created under central bank quantitative easing (QE) programs at astonishingly low, and sometimes negative, interest rates. Predictably this has led to a massive misallocation of capital, and billions in potentially non-performing loans.</div>
<div>&nbsp;</div>
<div>The problem for Italian banks became particularly acute when the fall of the Renzi government raised the possibility that a new Government could seek to lead Italy out of the Union and bring back the lira to Italy. With the return of its own currency, future Italian governments could devalue at will in order to pay the country&rsquo;smounting debts.&nbsp;If faced with the possibility that their euro-denominated deposits could be transformed into shrinking lira deposits some could be convinced to transfer funds into German banks&nbsp;where they&nbsp;would&nbsp;face&nbsp;no such peril (EU laws present no obstacles to cross-border banking). This is a clear recipe for a banking default.</div>
<div>&nbsp;</div>
<div>According to a 2016 IMF working paper (WP16135), Italian bank nonperforming loans had tripled&nbsp;since the crisis of 2008. It blamed &ldquo;A combination of over-indebted corporates following the sharp crisis-related drop in output, banks generally low in capital buffers, a highly complex legal system of corporate restructuring and insolvency, lengthy judicial processes and a tax system that until recently discouraged NPL write-offs &hellip; .&rdquo;&nbsp; On September 13th, Bloomberg estimated Italy&rsquo;s nonperforming loans at $394 billion&nbsp;through March&nbsp;or 16.1 percent of Europe&rsquo;s total,&nbsp;based on data from the European Central Bank (ECB).</div>
<div>&nbsp;</div>
<div>Furthermore, a relative lack of economic opportunity and a massive increase in inward migration has caused a marked increase in emigration from Italy, particularly among young males. The recently released OECD 2016 International Migration Outlook recognizes that, &ldquo;The public is losing faith in the capacity of governments to manage migration.&rdquo;&nbsp;Italian emigration more than doubled between 2010 and 2014. This contributed to an erosion of the bank deposit base.</div>
<div>&nbsp;</div>
<div>Italy is one of the world&rsquo;s most indebted nations with debts estimated in 2015 at over $2.4 trillion or 130 percent of its GDP, about half of which is comprised of government spending. Therefore, Italy is not well placed to finance a potentially devastating and fast developing domestic banking crisis.</div>
<div>&nbsp;</div>
<div>In the U.S. banking crisis of 2007/8, our government reacted quickly to a potential international financial meltdown by organizing the Troubled Asset Relief Program (TARP) to purchase &lsquo;toxic&rsquo; assets from banks bailed-out with taxpayer funds. Politically, it was highly unpopular. In Europe&rsquo;s case, influenced largely by Germany&rsquo;s unwillingness to make its citizens liable for foreign banks, the EU and Eurozone chose to leave its&nbsp;banks unaided while toxic or non-performing loans continued to fester. The EU&rsquo;s article 32 provides that equity and bondholders suffer financial loss before national governments are permitted to deploy taxpayer funds. It is a policy first developed by the EU, in conjunction with the IMF and ECB, in the rescue of Cypriot banks in 2015 when even certain large depositors&rsquo; funds were seized to make the banks whole. It was termed a &lsquo;bail-in&rsquo;<em>.</em></div>
<div>&nbsp;</div>
<div>MdP is a relatively small bank. As of June 30, 2016, its assets came in at just $182.9 billion, ranking the bank at only 121<sup>st</sup>&nbsp;largest internationally (<a href="https://mailct.europac.net/owa/redir.aspx?SURL=DzcWZq6GOmj2nY2gAMxPC0sDGxQ-np9yieMT6J8xKa9W2ddzX0XUCGgAdAB0AHAAOgAvAC8AdwB3AHcALgByAGUAbABiAGEAbgBrAHMALgBjAG8AbQA.&amp;URL=http%3a%2f%2fwww.relbanks.com" target="_blank">www.relbanks.com</a>). Regardless, the news of its potential collapse sent shock waves through Italy&rsquo;s banking community. However, the crisis does not appear to be contained (as they never are). Italy&rsquo;s second largest bank, UniCredit, S.p.A, with a deposit base of almost $1 trillion,&nbsp;has also come under intense scrutiny. But the larger bank was able to gain shareholder approval for a 10:1 reverse share split and a rights issue that raised some $13.8 billion of new capital.&nbsp;The combination met the demands of Article 32 of the EU Directive for a bail-in. It may have restored confidence sufficiently to ensure survival, for a time at least, without government intervention.</div>
<div>&nbsp;</div>
<div>The case of Monte dei Paschi was very different. The bank had waited until December 21<sup>st</sup>&nbsp;to declare that it had sufficient liquidity to last only four months. The shareholders of Monte dei Paschi,&nbsp;by the close of 2016 had experienced&nbsp;a&nbsp;large fall in&nbsp;earnings per share&nbsp;(EPS)&nbsp;and an&nbsp;almost complete collapse&nbsp;in the share price for the year.</div>
<div>&nbsp;</div>
<div>To make matters worse, like mortgage-backed securities that were distributed by Wall Street in the early 2000&rsquo;s, junior bonds in Italian banks were sold to risk averse retail investors as &lsquo;sound banking investments&rsquo;.&nbsp;The degree to which rank and file investors are exposed to the bank has made the case a politically charged issue.</div>
<div>&nbsp;</div>
<div>On December 21, 2016, Italy&rsquo;s finance minister, Piercarlo Padoan, implored his Parliament for rescue funds. Posturing that the Italian banking system was &ldquo;solid and healthy&rdquo;, he nevertheless urged adoption of government restructuring plans so that banks could&nbsp;&nbsp; &ldquo;&hellip; travel on their own legs, be profitable,&nbsp;and finance the economy.&rdquo;&nbsp;Later that day, the Italian Parliament approved a bank bail-out package of $20.8&nbsp;billion.&nbsp;However, Goldman Sachs had estimated earlier that almost $40 billion would be needed to ensure long term survival.&nbsp;(Financial Times, R. Sanderson, J. Politi, M. Arnold, 12/21/16)&nbsp;A London analyst had forecast even more.</div>
<div>&nbsp;</div>
<div>The range and conflicting data surrounding the bank&rsquo;s rescue make it unlikely the real amount necessary to halt the escalating Italian banking crisis is known or can be known any time soon. In today&rsquo;s highly interconnected financial world, Italy&rsquo;s banking problems are not restricted to Italy or even to the European Union. Estimates are that French, German, Japanese, Spanish, UK and U.S. banks are exposed to the debts of Italian banks approaching half a trillion dollars.</div>
<div>&nbsp;</div>
<div>Important general elections are due this year in France, The Netherlands, Germany and, owing to the failed Italian referendum, in Italy. In addition, Brexit has set a precedent in the minds of the European public that it is possible to escape the clutches of the EU. Also, should the UK succeed in leaving, the EU will lose its second largest economy and financial contributor. Doubtless, this potential erosion of EU funding and the recently exposed possibility of democratic &lsquo;revolution&rsquo; will act to focus the minds of the EU&rsquo;s bureaucracy increasingly on finding a political solution to Italy&rsquo;s banking woes.</div>
<div>&nbsp;</div>
<div>In aggregate, the problem facing certain European banks is so enormous that even bail-ins could prove politically untenable. A temporary stopgap could be an interim nationalization of Italian and perhaps other European banks. It might dawn gradually on politicians, bankers and even investors as a means of averting a financial and monetary meltdown and thereby help to secure unity within the EU. Furthermore, nationalization would save the banks and their depositors while, at the same time, allowing for much needed banking reforms and a return to more prudent lending practices. The recent rise in Italian bank share prices may indicate this view is gaining credence.</div>
<div>&nbsp;</div>
<div>In conjunction with the current &lsquo;war on cash&rsquo; and the growing pressure to initiate a global taxation system, bank nationalizations undoubtedly would mean a significant government intrusion into citizens&rsquo; cash and therefore over citizens&rsquo; lives, a major forward step in the globalist agenda.</div>
<div>&nbsp;</div>
<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/sAkYFI2sue0" height="1" width="1" alt=""/>Wed, 25 Jan 2017 20:52:23 +0000europac admin19475 at http://www.europac.comhttp://www.europac.com/commentaries/italy%E2%80%99s_bank_rescue_foreshadows_nationalization_more_eu_banksWar on Cash Spreads to Indiahttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/LdpBlKv9woc/war_cash_spreads_india
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<div style="border-bottom:1px solid #ccc;margin-bottom:10px;padding-bottom:10px;color:#777;font-style:italic;">Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.</div> </div>
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<span class="date-display-single">Wednesday, December 14, 2016</span> </div>
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<div>Over the past year, central banks, commercial bankers and prominent economists have expressed the view that digital money and transfers should replace large denomination cash and cash transactions. This dramatic transition has been fostered under the guise of the public interest in an effort to curb terrorism, tax evasion and criminal activity. Many observers contemplate more sinister motives that involve increased government control of economic activity. The latest country to engage in this &lsquo;war on cash&rsquo; is India.</div>
<div>&nbsp;</div>
<div>In a TV announcement on November 8<sup>th</sup>, India&rsquo;s Prime Minister Narendra Modi announced that the Reserve Bank of India&rsquo;s large denomination 500 and 1,000 rupee bank notes, worth some $7.5 and $15 respectively, would lose their status as legal tender on midnight on December 31, 2016.&nbsp;That meant holders of those notes (which represent 86 per cent of the value of all outstanding rupee notes) had less than two months to exchange the notes for smaller new notes, or lose out completely. The government also mandated than any large exchanges had to be accompanied by tax returns in order to prove that the cash generated had already been taxed.</div>
<div>&nbsp;</div>
<div>The shock waves from this announcement fueled fear and panic among the Indian population which is&nbsp;heavily cash-oriented. As few people have bank accounts and banks are thinly spread in rural areas, many Indians have been left holding paper currency redeemable only in banks which often are difficult to access. To make matters worse, banks soon ran out of small denomination notes. The result was chaos, rioting and trauma-induced deaths. Millions of poor Indians were unable to buy necessities or transact business. Many merchant shops had no alternative but to close.</div>
<div>&nbsp;</div>
<div>The BBC&rsquo;s website notes that India, the world&rsquo;s seventh largest economy &ldquo;&hellip;is overwhelmingly a cash economy, with 90% of all transactions taking place that way.&rdquo;&nbsp;At a sudden single stroke a socialist Prime Minister has converted most of the nation&rsquo;s private cash into bank deposits subject to direct governmental controls including spending and withdrawal limitations. Furthermore, the new bank deposits can be leveraged up as bank loans to government and to allow banks to purchase government bonds to finance social programs.</div>
<div>&nbsp;</div>
<div>It remains to be seen how severely India will be hit and what effect it will have on the international economy. With much of the world focused on the U.S. Presidential election, this Indian currency event was little reported in the western media.</div>
<div>&nbsp;</div>
<div>The Indian action was a largely unexpected escalation of the &lsquo;demonetization&rsquo; movement that has been spreading through the U.S. and Europe. This past year, Larry Summers proposed the withdrawal of the $100 bill&nbsp;and the ECB announced an end to printing 500-euro notes. The idea has been supported widely. With the notable exception of&nbsp;<em>The Wall Street Journal</em><em>,</em>&nbsp;major news media including&nbsp;<em>The Economist, The New York Times</em>&nbsp;and a recent Harvard paper have called for the elimination of high denomination currency.</div>
<div>&nbsp;</div>
<div>It could hardly be coincidental that just this week Nicolas Maduro, the bumbling socialist dictator of Venezuela, surprised his nation with monetary changes that are nearly identical to those being pursued by India. The collapsing Venezuelan economy already had the highest inflation rate in the world, and its starving citizens have had to transact what little commerce they can with ever larger stacks of nearly worthless currency. But to add insult to injury, Madura just deactivated the 100 Bolivar note, the country&rsquo;s largest note denomination, which until recently had a value of just 3 U.S. cents. Although the government predictably claimed that the move was aimed at speculators and foreign capitalists, it will be the poorest Venezuelans who will suffer most acutely.</div>
<div>&nbsp;</div>
<div>As in India and Venezeula, the reasons given for the elimination of cash is to protect citizens from terrorism, tax evasion and crime. Of course, when all financial transactions have to flow through banks, they can be monitored easily. Undoubtedly this does hinder some aspects of terrorism, tax evasion and crime. But the&nbsp;<em>real</em>&nbsp;reasons for demonetization are given far less oxygen. The move is spurred by the need to protect the ever larger &ldquo;too big to fail&rdquo; banks and the ability of governments to control and even legally utilize the private wealth of citizens. Cash can be sheltered from government, bank deposits cannot.</div>
<div>&nbsp;</div>
<div>The advent of zero and negative interest rates has reduced investment reward and resulted in a tax on savings. In a low, or negative, rate environment, those with cash have little if any financial incentive to hold money in banks. Cash hoarding is the logical alternative. In economic terms, hoarded cash becomes&nbsp;<em>dead&nbsp;</em>money<em>.&nbsp;</em>Outside the system it contributes nothing to economic activity. Specifically, it deflates the velocity of monetary circulation, a vital element of economic growth. Perhaps more importantly to a technically insolvent banking system, deposits withdrawn from banks, especially when combined with a rising rate of non-performing loans, can result in potentially fatal capital shortages. In today&rsquo;s over-leveraged and derivative-infused financial markets, a serious banking failure could escalate like lightning and threaten the entire international financial system.</div>
<div>&nbsp;</div>
<div>In their 2015 rescue of Cypriot banks, the IMF, ECB and western politicians effectively devised the &lsquo;bail-in&rsquo; as a new, less visible alternative to politically unpopular citizen bank bailouts. In a bail-in, it is the shareholders, bondholders and, ultimately, bank depositors who are called upon to fund an insolvent bank rather than injecting public funds. Despite the precedent of Cyprus, it remains surprising how many citizens remain blissfully unaware that when they open an account, they become creditors of the bank. Despite retaining&nbsp;<em>rights</em>&nbsp;to the funds, they no longer&nbsp;<em>own&nbsp;</em>the monies.</div>
<div>&nbsp;</div>
<div>In addition, if excessive government borrowing results in a collapse of government bond markets and a potentially crippling rise in interest rates, legislation mandating that each citizen hold a certain percentage of their wealth in government bonds would not be unrealistic. With digital money,&nbsp;bank computers can execute such commands quickly and easily. The depositor has no recourse other than the ballot box.</div>
<div>&nbsp;</div>
<div>While cash hoarding may offer added security to cash holders, as&nbsp;<em>dead&nbsp;</em>money it results in politically harmful damage to economic growth rates rendering banks more vulnerable. It follows that the increasingly ferocious and aggressive war on cash is a sign that central banks may see a dangerously deteriorating situation, one that has led to a feeling of desperation by governments and a strong wish to establish a legal means to control the wealth of citizens. They appear to be using political statements by banks, economists and the mass media to secure a meek surrender to a cashless society and the potential utilization of citizens&rsquo; accumulated cash wealth by legal means.</div>
<div>&nbsp;</div>
<div>Cash is an efficient, free, and private means of payment for ordinary citizens, particularly those without the funds to pay ever-increasing bank charges. Following the January 2016 World Economic Forum in Davos, the war on cash appeared to intensify. At that meeting, PayPal&rsquo;s CEO, Dan Schulman, claimed that 85 percent of transactions, by volume rather than by value, are in cash. Regardless, at the same conference, Deutsche Bank co-CEO, John Cryan, described cash as &ldquo;terribly inefficient.&rdquo; He predicted that we would &ldquo;probably&rdquo; see no more cash within the next ten years.</div>
<div>&nbsp;</div>
<div>Already, some major countries have limited cash transactions for law abiding citizens. In Italy, the legal limit for cash purchases is some $1340, in France the limit is 1,000 euros. Even in the UK, any cash transaction above some 15,000 pounds&nbsp;must be reported to the Inland Revenue. In the U.S., the mandated reporting figure to the Internal Revenue Service is $10,000.</div>
<div>&nbsp;</div>
<div>Some notably highly leveraged banks including Deutsche and UBS have called for the elimination of cash, while Citibank has eliminated cash in some of its Australian branches. As early as 2015, JPMorgan Chase warned that it would no longer accept cash in its safe deposit boxes. Separately, Chase said it was restricting cash payments for credit cards, mortgages, equity lines and auto loans.</div>
<div>&nbsp;</div>
<div>The Indian government&rsquo;s capture and compulsory transfer into bank accounts of some 86 percent of its citizens&rsquo; cash was a shock to Indians and to informed people around the world. It will be studied for&nbsp;lessons learned by the western nations as they pursue their own wars on cash. Likely they will take a more gradual approach, supported by mass media and senior bankers&rsquo; statements to support their assaults on the cash of compliant citizens. Whereas recently impoverished Indians may turn to silver, those in the developed world may look increasingly to gold&nbsp;as a store of wealth.</div>
<div>&nbsp;</div>
<div>The extent and speed of the exercise of governmental power to restrict the use or to control the accumulated wealth of citizens never should be ignored or underestimated.</div>
<div>&nbsp;</div>
<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/LdpBlKv9woc" height="1" width="1" alt=""/>Wed, 14 Dec 2016 15:46:08 +0000europac admin19262 at http://www.europac.comhttp://www.europac.com/commentaries/war_cash_spreads_indiaTrump Triumphs as Brexit Faces a Serious Threathttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/I311GooZpJ4/trump_triumphs_brexit_faces_serious_threat
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<span class="date-display-single">Tuesday, November 15, 2016</span> </div>
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<div>Brexit and the Donald Trump&nbsp;presidential victory should rightly be viewed as the most significant international developments of the last decade. Both events illustrate a breaking down of globalist order and they both threaten the entrenched elite that has so ruthlessly and painfully hurt the middle and working classes. But as Trump supporters revel in the largely unanticipated&nbsp;victory, Brexit faces a serious new challenge.</div>
<div>&nbsp;</div>
<div>On November 3, 2016, The English High Court ruled that the UK&rsquo;s withdrawal from the EU would affect substantially the &ldquo;rights of individuals within the UK.&rdquo;&nbsp;As a result, the Court concluded that despite the referendum, and the &ldquo;Crown prerogative&rdquo; that grants the Government considerable leeway, particularly in matters of foreign affairs, the decision to leave the EU must&nbsp;be&nbsp;made by Parliament. Given that the government has made many decisions to&nbsp;<em>increase</em>&nbsp;the UK&rsquo;s &ldquo;ever-closer&rdquo; integration into the EU over the years, which clearly affected the &ldquo;rights of UK individuals,&rdquo; it is curious that the Court would finally decide to step in when the government was moving in the other direction.</div>
<div>&nbsp;</div>
<div>The May Government has announced that it will appeal to the UK&rsquo;s Supreme Court. Some lawyers advise that should the Supreme Court overrule the High Court, the Claimants might appeal still to the European Court of Human Rights under the Human Rights Act 1998. Whether this Court would accept jurisdiction is unclear.</div>
<div>Regardless, the current Government and the Brexit camp are shocked and angry at the High Court&rsquo;s ruling. They are joined by powerful sections of the UK&rsquo;s mass media including the&nbsp;<em>Daily</em>&nbsp;<em>Mail</em>&nbsp;which has labeled the High Court as being &ldquo;Enemies of The People&rdquo;&nbsp;(James Slack, 11/3/16).</div>
<div>&nbsp;</div>
<div>If the&nbsp;Supreme Court upholds the High Court decision, it is likely that Prime Minister May will have to consult Parliament. She is unlikely to find there a receptive audience. According to&nbsp;<em>Business Insider</em>&nbsp;some 73 percent of the 650 Members of the House of Commons, and probably a greater percentage of Peers in the House of Lords, were and probably are still in favor of remaining in the EU&nbsp;(Jim Edwards, 11/3/16). This means that the members of Parliament can easily rise up and vote to restore the order that they so clearly believe should be restored. But will they be prepared to defy the will of the people? This is a tall order for every politician.</div>
<div>They could argue that the public will has changed since the vote and that the win was not all that decisive to begin with. Such arguments will be politically perilous.</div>
<div>&nbsp;</div>
<div>By 51.9 percent to 48.1 percent the British people voted for Brexit&nbsp;(BBC News). However, this seemingly small margin led to 61 percent of the UK&rsquo;s Parliamentary constituencies to vote for Brexit,&nbsp;according to data from the University of East Anglia.&nbsp;It will take very brave Conservative Members of Parliament to vote their conscious to remain, thereby defying both their party whips, who control their&nbsp;<em>promotions</em>&nbsp;within the Party, and the expressed will of their constituents who control their continued&nbsp;<em>membership</em>&nbsp;in Parliament. Even Labour members who may desperately want to remain in the EU, may be reticent to oppose the clear wishes of their voters to leave. The fractured leadership of the Labour Party may not be able to bring much pressure on wavering members to cast a &ldquo;remain&rdquo; vote. The remain sentiment in the House of Lords appears even stronger than in Commons. But if Prime Minister May were to add the threat of enacting further reform of the House of Lords, it might bring enough peers into line.</div>
<div>&nbsp;</div>
<div>The remain case&nbsp;has been further weakened by the lack of post-Brexit catastrophe forecast by Cameron and his allies before the vote. Recent headlines confirm the return of optimism: the&nbsp;<em>Telegraph&nbsp;</em>published, &ldquo;UK jobs&nbsp;market&nbsp;&lsquo;thriving&rsquo; after summer pause.&rdquo;&nbsp;<em>Cit</em><em>y</em><em>&nbsp;AM</em>&nbsp;reported &ldquo;Retail sales up in best month since January.&rdquo;&nbsp;Meanwhile, financial markets appear to have stabilized.</div>
<div>&nbsp;</div>
<div>Based on all this, it is hard to imagine that UK parliamentarians will stage a quixotic last minute stand to resist the independence of the UK.</div>
<div>&nbsp;</div>
<div>Regardless, the EU negotiators may insist that to retain access to EU markets the UK must open its boarders to EU immigrants, largely from the Middle East. If unacceptable to the UK government, likely it will result in a so-called &ldquo;Hard Brexit&rdquo; whereby the UK will be expelled. Should this occur, it will not be the first time England has been expelled from most of Europe. Should this occur, Britons should rejoice as history has shown that England does well when it does not yoke herself too closely to the Continent.</div>
<div>&nbsp;</div>
<div>When King Henry VIII broke with the Church of Rome, England was forced to trade worldwide. This put England into the exploration and colonization business, which proved to be quite fruitful. When Napoleon&rsquo;s influence spread across the&nbsp;Continent in the early 19<sup>th</sup>&nbsp;Century, Britain shut down European ports and looked to trade elsewhere. This resulted in the largest accumulation of empire in England&rsquo;s history, allowing the small island nation to garner wealth, political influence and military power on a global scale.</div>
<div>&nbsp;</div>
<div>Under Brexit, I believe the UK will be free to trade worldwide on terms that suit the UK&rsquo;s economy rather than that of the 28-nation EU, which has still no effective trade treaties with the U.S., China and Japan.</div>
<div>First Brexit and&nbsp;now Trump have exposed powerful popular feelings of deep resentment. An increasing number of voters feel ignored by what they perceive as self-serving, uncaring and unresponsive rulers who have created a political class that is cocooned away from the financial realities which plague normal citizens. It is not a political party but, as Trump describes, &ldquo;it&rsquo;s a movement.&rdquo; Likely, it will threaten the unraveling of conventional party politics in the U.S., the UK and the EU.</div>
<div>&nbsp;</div>
<div>Brexit and the U.S. election have clearly given momentum to the anti-globalist world view. Such forces are also gaining ascendency in Italy and France. However, the forces of globalization are extremely powerful and deeply entrenched. They will surely fight back. The first round will be in the UK Parliament. But&nbsp;no&nbsp;one knows where the fight will progress.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/I311GooZpJ4" height="1" width="1" alt=""/>Tue, 15 Nov 2016 17:12:54 +0000europac admin19113 at http://www.europac.comhttp://www.europac.com/commentaries/trump_triumphs_brexit_faces_serious_threatGlobalization Faces Challengeshttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/7zuEW3U0WJ0/globalization_faces_challenges
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<span class="date-display-single">Wednesday, October 26, 2016</span> </div>
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<div>For much of the second half of the 20<sup>th</sup>&nbsp;Century, and even into the new millennium, &ldquo;Globalization&rdquo; was the dominant theme used to describe the drift of the world economy. It was widely considered both natural and inevitable that the world economy would continue to integrate and that national boundaries would become less constraining to commerce and culture. And with the exception of the eternal &ldquo;anti-globalization&rdquo; protesters, who robotically appeared at large gatherings of world leaders, the benefits of globalization were widely lauded by politicians, corporate leaders and rank and file citizens alike. But a casual glance at the world headlines of 2016 suggests that the belief in globalization has crested, and is now in retreat. What are the consequences of this change?</div>
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<div>International trade has existed for millennia. But few modern historians would characterize the trade caravans that crossed the Himalayas and the Sahara as sources of international conflict. Rather, they are widely seen as a useful means to bring goods that were plentiful from one region to other regions where they were scarce. Along the way, routes like the Silk Road in Asia created a great number of positive secondary benefits in culture and politics. But relatively modern developments such as ocean-going sailing ships, modern navigation, and steam and diesel power, have greatly increased the size and scope of trade. Globalism was also boosted rapidly by technological advances in communications, including intercontinental jet travel, fax machines, satellite telephones, the Internet, real time money transfers and massive investment flows to international and emerging markets.</div>
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<div>Since the end of WWII, the establishment of international reserve currencies and the rise of supranational organizations, such as the United Nations, The World Bank, and International Monetary Fund, has saddled trade with more political baggage.&nbsp;The rise of bi-lateral and multi-lateral trade negotiations, which are often shadowy and bureaucratic affairs conducted behind closed doors, have further eroded support for trade. Oftentimes these efforts have resulted in deals that clearly favor politically connected players and have given rise to&nbsp; justified accusations of cronyism.&nbsp;By opening larger markets and reducing costs, certain corporations have amassed shocking wealth. The benefits to workers are far more diffuse and difficult to quantify.</div>
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<div>The Harvard Business Review of May 13, 2016 published an article by Branko Milanovic about the unequal distribution of wealth generated by globalism. Milanovic comments that, since the mid-1980s, globalism has resulted in the &ldquo;greatest reshuffle of personal incomes since the Industrial Revolution. It&rsquo;s also the first time that global inequality has declined in the past two hundred years.&rdquo; Milanovic points to two main conclusions. First, he highlights the massive percentage gain in wages in Asia, particularly among the middle classes. In some cases, percentage wage gains in the Asian middle class have eclipsed the percentage gains experienced by the top one percent in the richer Western economies.</div>
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<div>In stark contrast, the U.S. and Western lower and middle classes have enjoyed almost no percentage wage increases, while their top one percent was the only group to experience significant income gains, based on available household surveys from 1988 to 2008.&nbsp;<span style="letter-spacing:0.01em">A recent unpublished paper by John E. Roemer, a political scientist at Yale, suggests that the diminishing of global inequality made possible by trade is far less potent politically than the relative increases in national inequality. In other words, the benefits of globalism are obscured while the costs are highly visible.</span></div>
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<div>The agricultural revolution that occurred in the United States in the early 20<sup>th</sup>&nbsp;century greatly diminished the need for farm workers. But the change spanned two generations and allowed time for migration and adaptation for factory jobs. The globalism that we have seen in the last 20-30 years has been even more rapid and transforming.</div>
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<div>Enabled by their wealth and past successes, the developed nations have, over the past few generations, adopted labor policies that have made them less able to compete against lower cost manufacturers in the developing world. This has widened the divide between white collar and blue collar workers. Long-term unemployment among normally hard-working people can lead to the loss of a sense of worth, depression and to&nbsp;dangerous dependencies on drugs and alcohol, even to suicide. It poses risks to social and political stability. These concerns are now expressing themselves politically.</div>
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<div>Nowhere has globalization been championed harder than in the European Union. Lingering devastation from two world wars led many to look to greater integration, both within Europe and without, as a means to achieve lasting peace. However, the creation of the EU super state has trampled the local autonomy of once proud nations,&nbsp;and&nbsp;has convinced voters&nbsp;there&nbsp;that globalization is fundamentally undemocratic. This erosion of trust in government elites, and the free trade they promote, has led to a backlash. The successful Brexit vote was the clearest manifestation of this trend. But it is likely not the last.</div>
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<div>More recently, a high profile trade agreement negotiated by 27 governments over seven years (that would have theoretically benefited 500 million citizens of the EU and 35 million Canadians) was killed by the objections of 3.5 million Belgian Walloons (B. McKenna, The Globe and Mail, 10/25/16). Notably, the Belgians&rsquo; reluctance did not appear to stem from their desire to protect a specific domestic industry but from their general views about how globalization supposedly punishes workers. The New York Times had reported last Friday the Canadian International Trade Minister, Chrystia Freeland, as saying, &ldquo;&hellip;the EU is not capable now to have an international deal, even with a nation with such European values like Canada.&rdquo;</div>
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<div>Much will depend upon how the EU adapts to the new political climate precipitated by Brexit. If it fails to do so adequately, its euro currency could become suspect. As the world&rsquo;s second currency, this would have serious implications for the international monetary and investment communities.</div>
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<div>A similar populist angst has evolved in the U.S. giving rise to the unanticipated voter appeal of Presidential candidates like Bernie Sanders and Donald Trump. Ominously, anti-trade rhetoric is on the rise on both the left and the right of the political spectrum. Even the Clintons, once the standard-bearers of the free trade center, have turned against the principles of Globalism. As a candidate, Hillary Clinton has turned against the Trans Pacific Partnership that she backed as Secretary of State, and has even fallen into criticism of NAFTA, one of the signature achievements of her husband&rsquo;s presidency.</div>
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<div>The recent episodes with Apple Computer and Deutsche Bank also offer potentially dark previews of how anti-globalization forces could impact corporations and economies. While they remain separate issues on paper, the government confrontations that currently embroil the two companies have led many to determine that they are linked.</div>
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<div>In September,&nbsp;Apple Computer, perhaps the U.S.&rsquo; premiere technology and industrial company, was fined a staggering $14 billion by the European Union for having supposedly transferred taxable income, derived throughout the European Union, to the low tax jurisdiction of Ireland, thereby evading taxes that should have been paid to many other EU nations. Although the tax structures had been created by the Irish government (that&nbsp;fought hand in hand with Apple against the EU), Brussels nevertheless held Apple liable.&nbsp;<a href="https://mailct.europac.net/owa/redir.aspx?SURL=qNXbJByJ2vptJmaGHBx3F0huTctqMGXud_pYbKtjl_6TPnEDpf3TCGgAdAB0AHAAOgAvAC8AdwB3AHcALgBlAHUAcgBvAHAAYQBjAC4AYwBvAG0ALwBjAG8AbQBtAGUAbgB0AGEAcgBpAGUAcwAvAGEAcABwAGwAZQBfAHQAYQB4AF8AZwByAGEAYgBfAGUAdQBfAGkAbgB2AGEAZABlAHMAXwBpAHIAcwBfAGEAaQByAHMAcABhAGMAZQA.&amp;URL=http%3a%2f%2fwww.europac.com%2fcommentaries%2fapple_tax_grab_eu_invades_irs_airspace" target="_blank">The decision also invoked howls of condemnation from Washington</a>, where many claimed&nbsp;Europe was capturing taxes that rightly should have been shipped back across the Atlantic.</div>
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<div>Just two weeks after the broadside against Apple, the U.S. Department of Justice announced a $14 billion fine leveled against Deutsche Bank, Germany&rsquo;s premiere financial institution, stemming from &ldquo;irregularities&rdquo; in the bank&rsquo;s mortgage finance business in the years leading up to the financial crash of 2008. While many U.S. banks were hit with similar fines for similar conduct, the size of the Deutsche Bank fine was much larger than had been anticipated. The Bank claimed that it did not have the resources to pay and the German government has voiced its own displeasure at the heavy-handed treatment from Washington. Many have suggested a&nbsp;<em>quid pro quo</em>&nbsp;related to Apple. If so, such disputes in the future could threaten global economic cooperation.</div>
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<div>Pressures on politicians likely will rise dramatically to ensure more equitable sharing of new national wealth, and the protection of traditional domestic industries. This will inspire them to suggest popular sounding protectionist policies, further exacerbating the economic stagnation on display in the West, and perhaps increasing global instability and mistrust.</div>
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<div>Those countries that embrace free and fair trade with new technologies stand to reap great rewards. Those who do not, and revert to trade protectionism,&nbsp;could experience economic recession and monetary adversity accompanied by serious social and financial upheaval. But like everything else in the world today, the trends do not look benign.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/7zuEW3U0WJ0" height="1" width="1" alt=""/>Wed, 26 Oct 2016 13:59:52 +0000europac admin19000 at http://www.europac.comhttp://www.europac.com/commentaries/globalization_faces_challengesApple Tax Grab by EU Invades IRS Airspacehttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/Xx47A37IwAQ/apple_tax_grab_eu_invades_irs_airspace
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<span class="date-display-single">Thursday, September 15, 2016</span> </div>
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<div>On August 30<sup>th</sup>, the European Union (EU) Commission ordered the Irish government to reclaim some $14.6 billion of so-called back taxes plus interest from Apple Inc.&nbsp;The order challenged sovereign tax authority within the EU and well-established international tax rules. The aggressive stance of the Commission set off a furor of high level political argument among taxing authorities and multinational companies accustomed to complex but legal international tax planning. Apple&rsquo;s case was big enough to place it at center stage in a simmering problem for governments in striking a balance between attracting businesses, creating jobs, generating taxes and deciding precisely what type of earnings can be taxed.</div>
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<div>In a testament to how strange the taxing regimes have become, the Irish government has protested loudly and is reluctant to take the nearly 15 billion the EU says it is entitled. When small countries turn down such sums, it should be clear that the stakes are much higher.</div>
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<div>With uncontrolled socialism and Keynesian monetary policies killing economic growth around the world, governments have ever greater need to wring revenue from the relatively stagnant pool of corporations and wealthy individuals. While the crackdown on personal tax havens, in Switzerland and the Channel Islands for instance, has been largely successful, corporations have become extremely adept using legal loopholes and creative international accounting to move revenues from high tax jurisdictions to countries where rates are lower. As of October, Reuters reported that U.S. based companies have some $2.1 trillion parked abroad in order to avoid high domestic taxes.&nbsp;Apparently Apple, the world&rsquo;s largest company by market capitalization, accounts for over $180 billion of this total.</div>
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<div>The U.S. corporate tax rate of 35 percent&nbsp;is widely considered to be uncompetitive and even excessive when compared with Ireland&rsquo;s 12.5 percent rate&nbsp;(and even the 20 percent in the UK). It is an old adage that capital flows to where it is treated best. Ireland rolled out the red carpet for Apple, a decision that greatly benefited both.</div>
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<div>Apple established a company in County Cork, Ireland in October 1980, sometime before Apple blossomed financially. Since then, Apple has become one of the largest taxpayers in the world and, according to its CEO, Tim Cook, the largest taxpayer in Ireland where it employs almost 6,000 people, mostly in high paying jobs, adding great benefit to the Irish economy both directly and by encouraging copycat corporations. (A Message to the Apple Community in Europe, 8/30/16)</div>
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<div>In the last quarter, Apple paid nearly&nbsp;$3 billion in taxes or about $12 billion at an annual rate. Naturally, by using such mechanisms as licensing, pricing differentials and overhead allocations, profits, unlike sales revenues, are somewhat mobile. This is so especially since high value commerce evolved from trading physical goods to intellectual property.</div>
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<div>The World Bank reports that in aggregate (2015) the EU is the world&rsquo;s second largest economy.&nbsp;However, despite its population of over 510 million, the EU has failed to spawn new technology giants such as Apple, Google, and Amazon. Many observers blame the socialist and over-regulated nature of the EU. Certainly these factors provided reasons for the Brexit vote in June 2016. Many feel that the Brexit vote may have persuaded EU officials to soften their regulatory aggression, out of fear of encouraging other countries to seek the exits. Regardless, for some two years, the unelected EU Commission has been investigating&nbsp;the&nbsp;<em>theoretical</em>&nbsp;tax liabilities of U.S. companies such as Apple, Google, Amazon, McDonald&rsquo;s and Starbucks.</div>
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<div>Until August 30<sup>th</sup>, all EU member countries were free to establish their own tax regimes. The EU&rsquo;s order for Ireland to demand some $14.6 billion in &lsquo;back&rsquo; taxes from Apple was an unexpected and unabashed power grab by unelected EU regulators over the democratic government of Ireland. The assessment did not result from the non-payment of an actual tax but on a theoretical tax that the EU Commission felt should have applied. This is a bold move.</div>
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<div>EU Competition Commissioner Margrethe Vestager described the prior arrangements made between Apple and the Government of Ireland as an &ldquo;inconsistency&rdquo; or state aid, illegal under the EU rules. The Irish finance minister, Michael Noonan, said that his government would appeal the decision, adding that it was &ldquo;&hellip;necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.&rdquo; (Lexology, Ronan Daly Jermyn, 8/31/16)</div>
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<div>Understandably, the Irish government is balking at what it sees as EU overreach into Ireland&rsquo;s sovereign right to administer its own tax affairs. They maintain there was no &lsquo;special&rsquo; or &lsquo;sweetheart&rsquo; deal. Meanwhile, some UK government ministers, soon to negotiate their freedom from the EU, reportedly told The Daily Mail that they see the Commission&rsquo;s demand as representing a significant &ldquo;opportunity&rdquo; for the UK to attract more international companies.</div>
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<div>The U.S. government is faced with somewhat of a conflict. Bloomberg reported a U.S. Treasury spokesman illustrating this point when he said, &ldquo;We believe that retroactive tax assessments by the [EU] commission&hellip;call into question the tax rules of individual [EU] Member States. &hellip;&rdquo;&nbsp;That all sounded very fair and pro free enterprise. But then, in a stinging globalist sentence, the Treasury spokesman added, &ldquo;&hellip;we will continue to work with the [EU] commission toward our shared objective of preventing the erosion of our corporate tax bases.&rdquo; (Nate Lanxon, 8/30/16)</div>
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<div>The U.S. Treasury has described the EU ruling as &ldquo;deeply troubling.&rdquo;&nbsp;The U.S. Congress is bringing pressure on Treasury Secretary Jacob Lew, urging him to consider retaliation including taxes on European companies and individuals.&nbsp;Meanwhile, Secretary Lew maintained in a speech at the Brookings Institution that the EU Commission &ldquo;is using a theory to make tax law, is doing it in a way that is retroactive and that overrides national tax law authority.&rdquo; (Alan Rappeport, The NY Times, 8/31/16)</div>
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<div>Apple is just one of the companies holding profits offshore to avoid paying U.S. taxes. According to Bloomberg, Apple has $232 billion in cash, of which about $214 billion is held outside the U.S. with its 35 percent corporate tax rate. The thought that the EU might grab some of the offshore money may reinvigorate Congress to revise the complex U.S. tax code. In other words, allow repatriation now to avoid the grasping claws of foreign governments later. It may even pressure Congress to bring the U.S. corporate tax rates down to more competitive levels.</div>
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<div>It is conceivable that the litigation will continue over the next three or four years. Whatever the EU court decides ultimately, the ramifications for international commercial tax planning could be profound. It might lead to major changes in corporate structures. Investors should be aware that this issue could affect corporate profitability to an important degree.</div>
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<div>Most importantly, the affair provides a clear example of how high taxes kill growth. Regrettably, those lessons appear to&nbsp;be lost on regulators on both sides of the Atlantic.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/Xx47A37IwAQ" height="1" width="1" alt=""/>Thu, 15 Sep 2016 17:05:21 +0000europac admin18787 at http://www.europac.comhttp://www.europac.com/commentaries/apple_tax_grab_eu_invades_irs_airspaceUK’s Prime Minister Commits to Successful Brexithttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/xII_QXWpgf8/uk%E2%80%99s_prime_minister_commits_successful_brexit
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<span class="date-display-single">Thursday, August 4, 2016</span> </div>
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<p>On June 23<sup>rd</sup>, despite months&nbsp;of fear mongering by former Prime Minister David Cameron and his allies, doomsday global economic forecasts offered by the International Monetary Fund&nbsp;and the Obama Administration, and a steady drumbeat of anti-Brexit&nbsp;news stories&nbsp;by the BBC, The Economist&nbsp;and the Financial Times, the British people delivered an unexpected event to the global financial system by voting to take Britain out of the European Union. Despite the forecasts of doom and gloom, the people voted for freedom, democracy and common law.</p>
<p>Most of the elites continue to warn of dire consequences for Britain and many believe that the separation process will be long, messy, and perhaps even farcical. Many argue that Britain will seek some sort of reconciliation once it&nbsp;realizes the true costs of&nbsp;its&nbsp;hubris. A July visit to the UK convinced me otherwise.</p>
<p>While in England, I had the good fortune to attend the first parliamentary question session with newly&nbsp;minted Prime Minister Theresa May. Those fiery exchanges convinced me that she will take her time to negotiate a sensible and mutually beneficial Brexit treaty. Provided she can control the civil service apparatus (dominated by interests that leaned heavily toward the &ldquo;remain&rdquo; camp), May appears set to achieve Parliamentary approval and Royal Assent.</p>
<p>Tickets for in-person attendance to Prime Minister&rsquo;s Questions (or PMQ&rsquo;s as they are known) are typically hard to come by. This is particularly true when a new Prime Minister is being tested in the ring for the first time. Sitting on a special bench on the floor of the House in the immediate vicinity of Members afforded me the rare opportunity to sense the mood and &lsquo;music&rsquo; of the House. It had been 37 years and one month since as a Member of Parliament I had listened to Margaret Thatcher tackle her initial PMQ&rsquo;s as the UK&rsquo;s first female Prime Minister. The comparison was not only interesting, but it influenced my outlook for the prospects of Brexit.</p>
<p>As Big Ben struck noon on July 20<sup>th</sup>, Mr. Speaker called &ldquo;Questions to the Prime Minister.&rdquo; Theresa May rose to Conservative cheers. Like Thatcher, she radiated composure and authority. With long experience as Home Secretary, she was very confident at the dispatch box even congratulating one Brexit questioner, Sir Edward Leigh, on his birthday. Most importantly, she established the central theme of her initial EU strategy by saying: &ldquo;&hellip;Yes, the United Kingdom will leave the European Union, but the United Kingdom is not leaving Europe and our cooperation will continue.&rdquo; (Sputnik International, UK-EU Security Cooperation<strong>&hellip;</strong>, 7/20/16) Subsequently, other ministers echoed this pivotal position.</p>
<p>As PMQ&rsquo;s continued, one could not help contrasting May with Thatcher. Like Thatcher, May appeared utterly&nbsp;convinced&nbsp;of her cause. She is tough and unafraid to shed blood. She cut swathes in Cameron&rsquo;s cabinet, even sacking Chancellor Osborne. However, rather than exhibiting a Thatcher-like delight in verbal combat, May preferred persuasion as the vehicle to bring House and country together, saying: &ldquo;&hellip;&nbsp;The Conservative party will be spending those [recess] months bringing this country back together.&rdquo;&nbsp;(Reuters, Kylie MacLellan &amp; William James, 7/20/16)&nbsp;To a considerable extent May is a mirror of Thatcher, but with some important updated improvements. Less verbally&nbsp;combative, she has the ability to inject humor, which Thatcher found somewhat difficult.</p>
<p>I went to London deeply skeptical that, as a &lsquo;remain&rsquo; voter, May would negotiate a Brexit treaty that she would then allow to be defeated piecemeal by the civil service or by the House. I came away feeling somewhat less skeptical. Apparently, May intends to play a long game to allow Chancellor Angela Merkel, the EU&rsquo;s effective leader, to encourage cooler heads to prevail in negotiating a workable, mutually acceptable treaty. Such a delay would allow time for other nations to push for changes within the EU (like those urged by Italy for other nations to rescue its failing banks). Such suggestions of intra<strong>-</strong>EU changes might strengthen the UK&rsquo;s negotiating position.</p>
<p>Following PMQ&rsquo;s, I spoke to Boris Johnson and some former Brexit colleagues. They agreed with this analysis and although I did not discuss it with Johnson, all the others thought May&rsquo;s performance was outstanding and that the UK would flourish under her leadership. Doubtless, the Brexit vote came as a shock to the British Establishment and resulted in some immediate uncertainty and alarm. In the medium term it can be expected to delay some investment and business decisions.</p>
<p>For example, the Common Agricultural Policy (CAP) lavished considerable sums on certain large farms in return for their commitments to reduce crop production. Of course, the CAP was designed&nbsp;in part&nbsp;to subsidize&nbsp;French farming&nbsp;and to reduce competition from larger more efficient&nbsp;farmers.</p>
<p>With Brexit, British farmers will be free again to farm all their land and so reduce not only the UK&rsquo;s contributions to the CAP, but also help decrease Britain&rsquo;s balance of payments! Furthermore, unrestricted by the absence of EU trade agreements with the U.S., Japan and China, the UK will be free to negotiate treaties with three of the world&rsquo;s largest economies tailored to its own productive strengths, as opposed to those benefitting Germany and France. Already, Britain&rsquo;s new trade negotiations with China are causing ruffled feathers in the U.S.</p>
<p>In an article appearing in The Washington Post on June 24 on Brexit, economist Larry Summers said: &ldquo;&hellip;the prospects for Europe may in some ways be worse than for the UK.&rdquo;&nbsp;He is not alone in this opinion. At a weekend house party in the English countryside attended by a Member of Parliament, a senior investment banker, a former IBM executive, a former member of MI5 and a graduate of INSEAD, the leading European business school, I found a consensus that implementing Brexit was in the best interests of the UK.</p>
<p>Later,&nbsp;I had an interesting exchange with a highly successful businessman who told me that in retrospect he should have voted for Brexit instead of the &ldquo;remain&rdquo; vote that he had cast.</p>
<p>If Theresa May continues to enjoy good chemistry with the German Chancellor while inspiring parliamentary and civil service support, it may be&nbsp;that, following a period of uncertainty, Brexit will succeed and prove&nbsp;beneficial to the UK. If this happens, it is possible that Sterling, currently at $1.31, will be seen as undervalued. The same could hold true for British stocks, many of which sold off sharply following the Brexit vote.&nbsp;</p>
<p>Conversely, if the EU fails to respond positively to the challenges presented by Brexit, the euro could be seen as overvalued, if not flawed fatally. But a successful British disengagement from the EU may encourage other European nations to also seek exit, which could further weaken the euro. In other words, I believe Brexit does not offer a good outcome for the euro in just about any scenario.</p>
<p>If there is a major move out of the euro, it may result&nbsp;in a stronger pound sterling and possibly a stronger dollar. This would likely push the prospect of a Fed rate hike even further into the future as the Fed has already voiced concern that the dollar is valued too highly.&nbsp;The economic catastrophe promised by those who opposed Brexit may have been nothing but a smoke screen.</p>
<p><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></p>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/xII_QXWpgf8" height="1" width="1" alt=""/>Thu, 04 Aug 2016 16:55:28 +0000europac admin18568 at http://www.europac.comhttp://www.europac.com/commentaries/uk%E2%80%99s_prime_minister_commits_successful_brexitA Brexit in Name Only?http://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/ccKhoXI1YFw/brexit_name_only
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<span class="date-display-single">Thursday, July 14, 2016</span> </div>
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<div>The BREXIT vote on June 23rd was part of a growing global trend in which ordinary people are expressing a desire to retain national sovereignty regardless of the cost and suffering that may be involved. The result is rightly seen as a repudiation of the political and financial elites, and should be viewed as evidence that the economic optimism presented in the halls of power has found scant credibility on the streets. The same sentiments can be seen on this side of the Atlantic in the surprising successes of the Donald Trump presidential campaign.</div>
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<div>Having failed to obtain a &lsquo;re-run&rsquo; of the vote, the elite in the UK now appear to be trying to erode BREXIT from within. If successful, this disregard of the people&rsquo;s wishes may result in a deepening political crisis but could affect investments and currencies in the short to medium term.</div>
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<div>The most immediate and apparent result of the Brexit has been the wholesale change in the leadership of Conservative, Labour and UKIP (United Kingdom Independence Party) parties. Perhaps the most stunning development has been the departure of Nigel Farage, the leader of UKIP and perhaps the most recognizable face of the Brexit movement. With the help of senior Conservatives such as Boris Johnson, Michael Gove and Andrea Leadsom, Farage achieved an historic and potentially game changing victory. However, UKIP, which pulls a majority of Thatcherite votes, has long been a thorn in the side of Conservatives who treat it in a manner similar to that in which elite Republicans treat Donald Trump and his supporters. Despite his preeminent role in the victory, Farage was offered no role in the BREXIT negotiating team. Feeling he had done all he could, and perhaps exhausted by the strain, he resigned the UKIP leadership.</div>
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<div>The machinations within the Conservative Party, which was split by the Brexit vote, have rivaled the palace intrigues of the Byzantine Court. The most immediate casualty was Prime Minister David Cameron, who had staked his career on the remain vote. His resignation became official today. Although late into the &ldquo;Leave&rdquo; camp, Conservative mayor of London Boris Johnson played a significant role in the Brexit victory. With some justification, he felt he should become the next Conservative leader. However, in a fit of excessive ambition, his main ally, Justice Minister Michael Gove, decided to knife Johnson in the back and stand himself as the Conservative leadership candidate. Apparently his disloyalty shocked even Parliamentarians within his own party. He was struck down rapidly. Last week, the Conservatives selected Theresa May, the current Home Secretary to become party leader and Prime Minister. She will be the first female occupant of 10 Downing Street since Margaret Thatcher. Interestingly, May remained largely quiet in the run-up to the Brexit vote and tepidly backed the &ldquo;remain&rdquo; camp.</div>
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<div>The Labour party, the main proponent of the &ldquo;remain&rdquo; campaign, is in similar disarray after having lost the most crucial vote in generations. Many Labourites ascribe the failure to the divisive influence of Party leader Jeremy Corbyn, who many view as too far left on the political spectrum to unite the opposition. As a result, there is a strong movement underway to replace him as the leader. There can be little doubt that this effort will bear fruit in the coming weeks.</div>
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<div>Only Britain&rsquo;s fourth party, the Pro-EU Liberal party, has kept very quiet.</div>
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<div>The power of the political and financial establishment in the UK should never be underestimated. While the new Prime Minister has expressed a strong desire to follow the will of the people and to stridently pursue dissolution of the union with Europe, her actual policies may be far more equivocal. It is my belief that Tory grandees have quietly placed a &ldquo;remain&rdquo; supporter in the top seat expressly to frustrate the will of the people. The implication of this is that most likely the BREXIT will be watered down and possibly drowned at birth. Such a development is totally in keeping with the massive EU con of enticing peoples into a free trade area only to transform it into a superstate to which all member nations will be subject.</div>
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<div>It has become clear increasingly that many powerful EU and international elite rulers want the UK to stay within the EU. Furthermore, some 75 percent of Conservative MPs want to remain. It was apparent from the start that even the most committed BREXIT Prime Minister would have had a difficult task to steer a successful and complex renegotiation through Parliament. A Prime Minister of less conviction will find it all to easy to tell the electorate that, try as they might, they were simply unable to get the new treaty obligations through Parliament.</div>
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<div>Already Theresa May has spoken of &lsquo;controlling&rsquo; net immigration rather than &lsquo;stopping&rsquo; it. This portends a very weak treaty whereby the demands of the EU will be met only by token resistance from a Conservative cabinet with secret &lsquo;remain&rsquo; sympathies. Of course, this will all be clouded with high sounding, but largely meaningless, achievements by the UK and painful concessions by the EU.</div>
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<div>What will it all mean for investments? The Pound Sterling could soon appear to be oversold, as will UK government bonds and the shares of some British companies. The euro also may be seen as undervalued.</div>
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<div>Many assume wrongly that the euro is an &lsquo;economic&rsquo; currency. In reality, it is a &lsquo;political&rsquo; currency, depending on political will rather than on economic strength. With the recapture of the UK, the EU will appear stronger, a fact that could be reflected in the euro&rsquo;s price.</div>
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<div>Judging from recent events, it is likely that with the aid of the UK and international elites, the EU will succeed in recapturing the UK regardless of the expressed popular will. We may have seen the passing of Britain&rsquo;s last peaceful attempt to regain its sovereignty.</div>
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<div><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/ccKhoXI1YFw" height="1" width="1" alt=""/>Thu, 14 Jul 2016 14:37:52 +0000europac admin18454 at http://www.europac.comhttp://www.europac.com/commentaries/brexit_name_onlyBrexit Fears are Deliberately Overblownhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/WoG8MsJxOLk/brexit_fears_are_deliberately_overblown
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<span class="date-display-single">Wednesday, June 8, 2016</span> </div>
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<p>As the June 23rd BREXIT (the UK-wide referendum to leave the EU) vote draws near, the polls indicate a close result. Those urging a vote for the UK to remain inside the EU are suggesting increasingly dire economic consequences that would follow a yes vote by the British people to leave. Voices from London, Brussels, and Washington have all put immense pressure on British voters to bend to the will of the elites. To listen to their commentary one would think that apocalypse was just around the corner. But is there any substance to their warnings?<br />
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The Pro-EU membership camp is led by Prime Minister David Cameron, supported by most of his cabinet, the Bank of England, the BBC and the massive support from the UK and EU governments that have funded enormous advertising campaigns against separation. Given this weight of their power, it is amazing how strong the support for a British exit (BREXIT) has remained.<br />
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When Britain first joined the European Economic Community (the precursor to the EU) in 1973, the primary motivation was the hopes of increasing British trade through participation in the world&rsquo;s largest free-trade zone. However, the hope that the union would simply be a free-trading zone of sovereign countries has morphed into a drive for an EU superstate that has relentlessly pushed for greater regulations on businesses and people and greater control of local laws that have nothing to do with trade.<br />
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It has been kept remarkably quiet, for instance, that the EU intends to divide the UK into eleven administrative regions, all reporting directly to Brussels. Although Scotland, Wales and Northern Ireland will remain intact as individual national regions, England will be split into eight regions. Worse still, the coastal counties of England will be teamed with regions in Portugal, France, the Netherlands and Germany, where they will remain in a minority role. Even the English Channel is to be renamed. Very little mention is of the EU proposal for EU-wide ID and tax numbers, likely heralding a heavy EU taxation regime.<br />
<br />
Likewise, the proposals to create EU-wide armed forces have been put quietly on the back burner. England has a long and proud history of struggling for its sovereignty. In just the past two centuries she has stood alone against Napoleon and Hitler, before inspiring other nations to join the fray. The presence of French or German armed forces used to support a European police force in the UK will not sit well with the English.<br />
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All this and many more threats to the British people have been kept largely quiet. Instead, the main activities of the Pro-EU group have been concentrated on the economic and monetary catastrophe that would face the UK if it were to cut itself off from trading with the EU. Some call this, &lsquo;Project Fear&rsquo;. The actual underlying facts paint a somewhat different picture, one that makes the Pro-EU case appear misleading, even deliberately so.<br />
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The basic argument is that with about 50 percent of its current trade with the EU, the UK would face a catastrophic economic and monetary collapse if it left the EU. As a threat, this sounds potentially devastating. Doubtless it has persuaded some. But in the light of reality, a different and far less worrying image emerges.<br />
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The UK has the fifth largest national economy in the world, according to 2015 figures compiled by the International Monetary Fund. In its present state of economic stagnation, the EU can ill-afford to lose the UK. According to the March 2016 Statistical Bulletin from the Office for National Statistics, the UK has had a negative trade balance in goods with the EU that has averaged about $8 billion a month this first quarter. If the UK were to leave without being able to negotiate an independent trade deal, the EU economy might shrink by some $96 billion a year. The UK was the second largest net contributor to the EU budget last year. It follows that the 8 English regions (with Scotland, Wales and N. Ireland considered as &#39;relatively poor&#39;) may in aggregate be the second largest suppliers of future intra-EU money transfers from the so-called &#39;rich&#39; to the poorer southern and eastern regions of Europe. In that sense, the EU needs the UK more than the other way round.<br />
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The Pro-EU camp ignore the trade balance issue completely and threaten, as did President Obama, that the UK would be left out in the cold, like Switzerland, and unable to negotiate its way out of a disaster. Switzerland is not an EU member and has an economy of less than a quarter the size of the UK&rsquo;s. And yet from 2009-2013 she exported, on average, 4.6 times the value per person to the EU than does the UK (The Truth About Trade Outside the EU, William Dartmouth MEP, June 2015). With a negative EU trade balance, why would the UK be unable to negotiate, from outside, a trade agreement at least as good as that achieved by Switzerland?<br />
<br />
[As an aside, over dinner many years ago, my occasional Lords and Commons golfing partner Dennis Thatcher asked me how the UK would survive alone in an era when world power blocks and corporations were getting bigger? I replied, &ldquo;In the same way as Switzerland.&rdquo; He retorted while hitting the table hard with his hand, &ldquo;That&rsquo;s just what Margaret thinks!&rdquo;]<br />
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Further, the EU negotiates international trade agreements under the auspices of the World Trade Organization (WTO), in the primary interests of the EU, not of the UK. England has flourished by trading globally, especially with the U.S. and the British Commonwealth. The EU has no trade agreements yet with China or Japan. Outside the EU, the UK would be enabled to negotiate freely to trade with the entire world and be unfettered by the EU where it has a muted voice of 1 among 28 members. Furthermore, free of burdensome and costly EU regulations, the British economy likely would be re-energized, particularly among the vital job-creating small business sector.<br />
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In addition to economic collapse, the Pro-EU camp postulates that the British pound sterling, still one of the top five global trading currencies, would plummet following a BREXIT. However, many informed observers believe the international monetary system is on the cusp of a major collapse. In these circumstances, the vital interests of the Federal Reserve, European Central Bank, Bank of Japan and even the Bank of China would be to steady the ship to avert a collapse of fiat currency. Unimaginable amounts of central bank money could be deployed to save the pound, rendering it a false scare.<br />
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On the other hand, although the UK is not a member of the euro, a BREXIT indirectly could threaten the euro, now the world&rsquo;s second currency.<br />
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Already a number of EU members are experiencing anti-EU sentiments among their people. The United Kingdom Independence Party (UKIP), which forced the BREXIT vote, is not alone. It is part of a sizable block, styled the Europe for Freedom and Direct Democracy (EFDD) group, in the EU parliament. It is comprised of representatives from the UK, France, Sweden, Italy, Poland, Lithuania and the Czech Republic. In addition, countries like Greece, Spain and Portugal are becoming very unhappy about the implications of Eurozone membership. A for BREXIT vote could ignite an implosion within the Eurozone rather than being a threat to Sterling. This may be what worries the international central banking and political elite most. It has led directly to massive global elite support for Cameron&rsquo;s Project Fear.<br />
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If the British public wises up to David Cameron&rsquo;s game of fear and vote for BREXIT, there will be some short-term shock and disruption in currencies, equities, bonds, precious metals and possibly employment. However, the global central bank and political elites could be expected to move very fast to avoid the development of deeper problems. Negotiations likely would be concluded very quickly to calm things down with minimal damage to the UK economy or its currency.</p>
<p><em>John Browne is a Senior Economic Consultant to Euro Pacific Capital.</em></p>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/WoG8MsJxOLk" height="1" width="1" alt=""/>Wed, 08 Jun 2016 20:16:29 +0000europac admin18268 at http://www.europac.comhttp://www.europac.com/commentaries/brexit_fears_are_deliberately_overblownNegative Rates May Be Positive for Goldhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/Pn68Vh1Sg3k/negative_rates_may_be_positive_gold
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<span class="date-display-single">Monday, April 18, 2016</span> </div>
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<div>As 2015 came to a close, most investors believed that 2016 would be a year dominated by a series of Fed rate hikes. That conviction solidified in mid-October when comments from multiple Fed officials convinced many that prior hints that the Fed would stay at zero percent rates had been false alarms. The Fed delivered on its promise in mid-December by actually raising rates by 25 basis points. Based on this, gold declined by 10% from October 14 to the end of the year, nearly matching its&nbsp;six year low. Many on Wall Street&nbsp;thought the declines would continue into 2016. They were decidedly wrong.</div>
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<div>In the first 14 weeks of the New Year, gold rose&nbsp;16%. The first quarter&nbsp;qualified as its best beginning year performance in 30 years (CNBC, E. Rosenbaum, 4/14/16). The reversal was prompted by stumbling stock markets and a series of sharply dovish turns from central banks around the world.</div>
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<div>Perhaps the main reason people buy gold is as a hedge against inflation. But uncertainty and fear contributed undoubtedly to gold&rsquo;s&nbsp;stellar&nbsp;first quarter rise. But will it continue? Opinions vary among some of the most revered gold analysts in large financial firms. They remain focused almost exclusively upon the major historical influence of the inflation outlook and possible rate hikes. And as a result, the mainstream financial firms have yet to alter their decidedly bearish outlook on gold. This could prove positive&nbsp;for those who take the contrarian position.</div>
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<div>In March, Kitco reported that Robin Bhar, head of metals research for Societe General,&nbsp;forecast&nbsp;an average gold price of&nbsp;$1,150 an ounce for 2016. Combined with the likelihood that fear and uncertainty are receding, Bhar believes that there may be&nbsp;a growing realization that &ldquo;the risk of an imminent U.S. recession, while not negligible, is far lower than the markets are currently factoring in.&rdquo;&nbsp;He expects&nbsp;the Fed could&nbsp;deliver multiple rate hikes in 2016 and perhaps several&nbsp;during the course of 2017. If this were to happen, the dollar should strengthen and gold should fall.</div>
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<div>Mr. Bhar&rsquo;s view is supported by Goldman Sachs&rsquo; global head of commodities, Jeff Currie, who in a CNBC TV interview on April 5<sup>th</sup>recommended not just a sell&nbsp;of gold, but a short sale. Given the drift of central bank policies around the world, it&rsquo;s hard to imagine why these banks can hold to these beliefs.&nbsp;This is particularly true in light of how widely and rapidly negative interest rates are spreading around the world. Bloomberg reports that as of Feb. 9, 2016, over $7 trillion of bonds, comprising some 29 percent of the Bloomberg Global Developed Sovereign Bond Index, offered negative yields. Another $9 trillion yielded zero to one percent. It is&nbsp;widely accepted that this number will grow rapidly as central banks push yields deeper into negative territory. These rates&nbsp;have already started to be&nbsp;passed through to consumers, who are being charged interest on their bank deposits.</div>
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<div>Negative rates are now looming so large that on April 15, the Wall Street Journal dedicated almost its&nbsp;entire &ldquo;Money &amp; Investing&rdquo; section to the global consequences of negative rates, a phenomenon that has no precedent in human financial history.&nbsp; The section included five separate articles that detailed the absurdities of negative rates, the strains they are placing on the financial system now, and the risks they create for the future.</div>
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<div>When&nbsp;bank charges are&nbsp;leveled on cash deposits that earn no interest, which are held in debased fiat currency, it may become tempting for more and more individuals to withdraw their funds. Their alternatives could be to buy stock investments, or to hold physical cash in the form of bank notes (which may or may not be stuffed into mattresses). A fall in bank deposits could hurt banks just when they may be&nbsp;hit with fines and increased regulation. Furthermore, even if arguably remote, falling deposits could trigger a cycle of further withdrawals. Given that central banks may&nbsp;confront such a scenario with even more currency debasement, precious metals could become an alternative&nbsp;form of cost-free cash.</div>
<div>&nbsp;</div>
<div>Sovereign debt (including negative rate bonds) form&nbsp;&lsquo;safe&rsquo; holdings in the portfolios of major banks, insurance companies and pension funds. In fact, one of the stories in the Journal described how German insurance companies are required to hold large quantities of &ldquo;safe&rdquo; government debt as &ldquo;assets.&rdquo; But&nbsp;these instruments not only offer negative returns, but they are vulnerable to declines&nbsp;in value if interest rates for newly issued bonds were to rise to anything approaching &lsquo;normal&rsquo; rates. It may be&nbsp;unlikely that these bonds will allow the insurance companies to meet&nbsp;the promises they have made to policyholders. A similar dynamic could threaten the financial viability of the world&rsquo;s &ldquo;too big to fail&rdquo; banks. This is just one more reason that we feel the world cannot tolerate a return to free market interest rates at this time.</div>
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<div>If the U.S. economy were to further approach recession, the Fed might&nbsp;have to choose between restarting its Quantitative Easing program or following Europe and Japan into negative territory. A return to QE would be problematic on two levels. Firstly, QE has recently been tried by the Fed, and there is little consensus that it was effective. Also, the goal of QE is to lower long term interest rates. But as long term rates are already at record lows in the United States, it is questionable that the Fed can push them down much further. This leaves negative rates, which work on the short end of the yield curve, as the more likely option.&nbsp;Notably, when asked in February at a Congressional hearing if the Fed would consider moving to negative rates, Chairwoman Janet Yellen refused to take such an experiment &ldquo;off the table.&rdquo;</div>
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<div>If negative rates fail to generate growth, and there is no sign that they will, central banks then may take the next logical step down the endless stimulus path. They may decide to bypass the financial system as a pathway to issue newly created fiat money (as in Quantitative Easing), in favor of delivering money directly to consumers. This is what is known as &ldquo;helicopter money,&rdquo; which the banks could drop from the skies onto an economy in hopes of getting consumers to spend. (But with consumer demand as low as it is, it remains to be seen whether consumers will spend such a windfall or hoard it.) While these policies are still on the fringes of central bank discussions, they may not be so for long.</div>
<div>&nbsp;</div>
<div>It should be apparent that bankers will not be deterred from trying any policy imaginable&nbsp;that&nbsp;punishes savers and&nbsp;destroys the value of fiat currencies. As these policies have shown to&nbsp;fail to achieve their goals, we should imagine that they will be administered for many years to come.</div>
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<div>Having risen so fast this year, and with confusion apparent even at the Fed regarding the outlook for interest rates, the price of gold could correct in the short-term. However, over the medium to long-term we remain very bullish. This view&nbsp;will be validated or impeached based on the behavior of the Federal Reserve over the next few months.</div>
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<div><em>This is not a solicitation of any order to buy or sell.</em></div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/Pn68Vh1Sg3k" height="1" width="1" alt=""/>Mon, 18 Apr 2016 07:30:11 +0000europac admin17996 at http://www.europac.comhttp://www.europac.com/commentaries/negative_rates_may_be_positive_goldGlobal Stakes for the Brexit Votehttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/3to9bmtKcEw/global_stakes_brexit_vote
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<span class="date-display-single">Tuesday, March 15, 2016</span> </div>
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<div>On February 20th, UK Prime Minister David Cameron announced that the &lsquo;in/out EU referendum&rsquo; he had promised in the campaign for the last parliamentary vote would finally take place on June 23rd. The outcome of the long-promised vote could have a tremendous impact not merely on the future of Mr. Cameron and his coalition but on the economic future of Great Britain and much of the world, including the European Union (EU) and the United States. It&#39;s arguable that the referendum will be the most significant vote the world will see between now and the U.S. presidential ballots in November.</div>
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<div>Of course, Mr. Cameron is desperately trying to convince Britons to cast their votes in favor of the UK remaining &lsquo;in&rsquo; the European Union. In order to pacify the deeply held mistrust of the European Union that is harbored by many in Great Britain, Cameron recently returned from negotiations in Brussels with a list of &ldquo;concessions&rdquo; from the EU which he claimed would secure a special status for the UK within the EU. Ominously for Cameron, French President Francois Hollande expressed doubt that the concessions would even be included in any binding treaty. Already the fault lines have sharpened and the political maneuvering has begun. But as with the current climate in the U.S., sentiment does not boil down to a simple left/right spectrum.</div>
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<div>A true understanding of the EU demands recognition of the basic rationale for its formation. In the late 1940s, European leaders, including Konrad Adenauer of West Germany and Jean Monnet of France, dreamed of a European superstate powerful enough to negotiate on equal terms with the U.S. and the Soviet Union. The resulting surrender of sovereignty by the once-proud European empire ruling nations was not to be achieved easily. Allegedly, Jean Monnet wrote to a friend in April 1952, &ldquo;Europe&rsquo;s nations should be guided towards the superstate without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose, but which will eventually and irreversibly lead to federation.&rdquo; (The End of the Nation States of Europe, Philip Jones 9/12/09, rense.com)</div>
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<div>Regardless of whether Monnet actually penned those words, the move towards &lsquo;ever closer political union&rsquo; has been pursued rigidly, relentlessly and ruthlessly by the Euro elite exactly as those words suggested. The path was lubricated by huge amounts of targeted funding and activism by the European Central Bank, which showered monetary largesse on those member nations facing financial strain. Although these wealth redistribution policies had become increasingly unpopular among the creditor nations of Europe&rsquo;s northern tier, they were not enough to derail the drive for further unionization. It was not until the recent wave of mass immigration from Muslim countries that the average European citizen began to realize just how much sovereignty their political leaders had yielded to the EU. Just this week, Angela Merkel&rsquo;s Christian Democrat party, which has long championed greater EU integration, took a major drubbing in local German elections as a result of her fanatical support of open borders for Middle Eastern refugees. The big winners were far right parties that oppose open borders and are pushing for the return of greater national sovereignty.</div>
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<div>However, these rumblings have yet to make a significant impact on policy.With the unique exception of Greenland, a Danish territory, the EU has allowed no national exits or even material retreats from its relentless drive towards ever closer political union. With this in mind, and in light of President Hollande&rsquo;s comments, many Britons have come to doubt that Cameron&rsquo;s promised &ldquo;special status&rdquo; will be all that special.</div>
<div>&nbsp;</div>
<div>According to yesterday&#39;s Financial Times poll tracker, 45 percent of British voters favored staying &lsquo;in&rsquo; the EU, with 40 percent against and 15 percent uncertain. The result is far from certain, leaving it open to political persuasion, including massive advertising.</div>
<div>&nbsp;</div>
<div>Perhaps the biggest political development of recent weeks has been the defection of Boris Johnson, the charismatic and popular conservative mayor of London to the &ldquo;out&rdquo; camp. By breaking with the leader of his own party, Johnson has threatened to fragment the Conservatives (much as Donald Trump is doing with the Republican Party). But, as with Trump, there may be more than purely ideological motivations behind Johnson&rsquo;s gambit.</div>
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<div>Even if victorious, Cameron could be seen by almost half the British people, and in particular among conservative elements, as having sold short his country&rsquo;s interests. Sensing this, he may have to resign soon after the June 23rd vote and try to hand the Premiership to his old friend, and Chancellor of the Exchequer, George Osborne. The succession plan may have been the push that Johnson needed to finally join the &lsquo;out&rsquo; campaign. His outstanding oratorical skills, combined with those of UK Independence Party&rsquo;s Nigel Farage, could prove to be a major factor in convincing a major portion of the undecided vote.</div>
<div>&nbsp;</div>
<div>The &ldquo;out&rdquo; crowd will likely need all the help it can get. The pro-EU forces are expected to deploy massive advertising expenditures to allege that British trade and economic vitality will plummet with an exit from the Eurozone. Even President Obama, who remains a popular political figure in Britain, intends a trip to the UK in April for the expressed purpose of galvanizing support for an &ldquo;in&rdquo; vote, according to a report yesterday in The Independent on Sunday. In response to that, Boris Johnson has excoriated Obama for meddling in internal British affairs and for supporting a surrender of sovereignty that would be wholly unpalatable to Americans.</div>
<div>&nbsp;</div>
<div>Great Britain, a late entrant, has long been the &lsquo;odd-man-out&rsquo; among EU member-nations. Its language, culture, its common law legal system and its financial capital markets are aligned closely to those of the United States.</div>
<div>&nbsp;</div>
<div>Even as a cultural &lsquo;misfit&rsquo;, the UK&rsquo;s membership is of great economic and political importance to the EU. According to 2014 figures from the IMF, Britain has the second largest European economy. Paying the second largest net contribution to the running costs (2013 figures from Highcharts.com), the UK is a key element in the EU&rsquo;s continued viability. Those who have been attempting to spread economic fear through dire warnings on lost trade have failed to mention that the EU has enjoyed a trade surplus with Britain, which rose to over $6 billion per month in 2014 (Office for National Statistics).</div>
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<div>Politically, Great Britain has an independent nuclear deterrent and a permanent seat on the UN&rsquo;s Security Council. In both of these critical areas, the UK has operated for over seven decades in uniquely close collaboration with the United States. Envious and covetous of this quiet but most powerful &lsquo;special relationship&rsquo;, the EU may want it severed.</div>
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<div>The implications of a revolutionary &lsquo;out&rsquo; vote by British voters should not be underestimated. It may influence even the U.S. election. Clearly, a BREXIT would represent a precedent for other nations, such as Greece, Portugal and even Italy, which already may wish covertly to leave the Germanic strictures of the Eurozone.</div>
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<div>Any major threat to the euro, the world&rsquo;s second fiat currency, could impact an international monetary order built on an unprecedented mountain of credit-based debt. The uncertainty of the political future of the EU combined with the costly effects of deeply negative rates in European banks could increase interest in alternative stores of value.</div>
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<div>June 23rd may prove to be a day of destiny for the United Kingdom, if not the world at large.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/3to9bmtKcEw" height="1" width="1" alt=""/>Tue, 15 Mar 2016 16:19:23 +0000europac admin17809 at http://www.europac.comhttp://www.europac.com/commentaries/global_stakes_brexit_voteAn Escalating War on Cashhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/AN-IbQJ2aNI/escalating_war_cash
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<span class="date-display-single">Wednesday, February 24, 2016</span> </div>
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<p>On February 16th, The Washington Post printed the article,&nbsp;&ldquo;It&rsquo;s time to kill the $100 bill.&rdquo;&nbsp;This came on the heels of a CNNMoney item, the day before, entitled &ldquo;Death of the 500 euro bill getting closer.&rdquo;&nbsp;The former&nbsp;cited&nbsp;a recent Harvard Kennedy School working&nbsp;paper, No. 52 by Senior Fellow Peter Sands, concluding that the abolition of high denomination notes would help deter &ldquo;tax evasion, financial crime, terrorist finance&nbsp;and corruption.&rdquo; In recent days, former Treasury Secretary Larry Summers, ECB President Mario Draghi, and even the editorial board of the New York Times, came out in support of the elimination of large currency notes. Apart from the question as to why these calls are being raised now with such frequency, the larger issue is whether these moves are actually needed or if they merely a subterfuge for more complex economic manipulations by central banks to extend control over private wealth.</p>
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<div>In early 2015, it was reported that Spain had already limited private cash transactions to 2,500 euros.&nbsp;Italy and France set limits of 1,000 euros.&nbsp;In France, all cash withdrawals in excess of 10,000 euros in a single month&nbsp;must be reported to government agencies.&nbsp;In the U.S., such limits are $10,000 per withdrawal. China, India and Sweden are among those with plans under way to eradicate cash.</div>
<div>&nbsp;</div>
<div>On April 20, 2015, the Mises Institute reported that Chase, a subsidiary of JPMorgan Chase and a bailout recipient of some $25 billion (ProPublica, 2/22/16), had announced restrictions on its customers&rsquo; ability to use cash in the payment of credit cards, mortgages, equity lines and auto loans.&nbsp;Before that, on April 1, 2015, Chase, in concert with JPMorgan, updated its safe deposit box lease agreement to provide, &ldquo;You agree not to store any cash or coins [including gold and silver] other than those found to have a collectible value.&rdquo;</div>
<div>&nbsp;</div>
<div>The war on cash unquestionably has extended from government into the private banking sector. But the public is predominantly unaware of the ever-increasing encroachment into individual privacy and freedom.</div>
<div>&nbsp;</div>
<div>On February 5, 2016, The New York Times reported, &ldquo;the United States could face a new recession in 2016 due to a &lsquo;perfect storm&rsquo; of economic conditions.&rdquo;&nbsp;Ten days later, in an introductory statement, Draghi told a European Parliamentary Committee that, &ldquo;In recent weeks, we have witnessed increasing concerns about the prospects for the global economy.&rdquo;</div>
<div>&nbsp;</div>
<div>When consumers worry about the economy, unemployment and their own finances, spending on non-essentials diminishes. Caution results also in paying down loans and hoarding cash.</div>
<div>&nbsp;</div>
<div>When economic growth falters, central banks lower interest rates and inject funds into the economy. But if consumer confidence falls further, cash hoarding causes a fall in the velocity of money. This stimulates central banks to discourage the hoarding of cash by introducing negative interest rates to&nbsp;force&nbsp;deposits out of banks. On February 10th, during her congressional testimony, Fed Chair Janet&nbsp;Yellen admitted that there had been a discussion&nbsp;but never fully researched&nbsp;&ldquo;the legal issues&rdquo;.&nbsp;However, her Vice-Chair, Stanley Fischer, already had told the Council on Foreign Relations, nine days earlier, that the Fed had discussed negative rate policy all the way back in 2012.</div>
<div>&nbsp;</div>
<div>Should negative rates fail to force funds out of banks, governments may look to limit,&nbsp;and even forbid,&nbsp;the use of cash in large transactions. This is tantamount to a war on cash as part of an effort to eliminate citizens&rsquo; control over their wealth.</div>
<div>&nbsp;</div>
<div>Furthermore, a war on cash could extend even to seizure of cash deposits under certain circumstances. The confiscation of bank deposits may seem remote to Americans. However, the 2013 Cypriot banking crisis exposed the new central bank stance of &lsquo;bail-ins&rsquo; whereby deposits could now be frozen and even confiscated to rescue a bank!</div>
<div>&nbsp;</div>
<div>Most of the great economic growth and apparent prosperity of the past 45 years, since the U.S. broke its dollar&rsquo;s last link to gold, has been financed by credit-unimaginable trillions of dollars of credit. At the heart of this massive credit system are the banks.</div>
<div>&nbsp;</div>
<div>The current collapse of oil prices places pressure on the sovereign wealth funds of oil-rich nations to reduce deposits and to sell securities. Lower deposits reduce the banks&rsquo; ability to lend and generate profits. If, simultaneously, a shrinking economy leads to bankruptcies and non-performing loans, banks would appear not only less profitable, but increasingly risky. Currently, banks are experiencing many of these pressures, which threaten a credit shortage just when it is needed most to boost confidence. This helps to explain why the current downturn in markets is being led by the financial sector.</div>
<div>&nbsp;</div>
<div>To help make sure that depositors&rsquo; money stays in banks despite the negative rates, governments have proposed measures to eradicate opportunities to pay in cash. These measures are camouflaged politically as &lsquo;protective&rsquo; means against money laundering, especially by terrorists.</div>
<div>&nbsp;</div>
<div>But perhaps the most insidious of government motivations to ban cash&nbsp;is to increase the capability of surveillance over all spending by citizens and corporations. Undoubtedly, this makes it harder for anyone to shield income from the taxman, but it also makes it more difficult to achieve any type of anonymity in the marketplace. Soon there may&nbsp;be no legal place to shield legitimate wealth or spending patterns from the eyes of politicians.</div>
<div>&nbsp;</div>
<div>Negative interest rates combined with the eradication of cash appear as a desperate attempt to control global private wealth. Jamie Dimon is one of the world&rsquo;s most astute and powerful individual bankers.</div>
<div>&nbsp;</div>
<div>On February 11th, he invested some $26.6 million in the depressed stock of his bank, JPMorgan Chase.&nbsp;Reported as demonstrating confidence, it may be that Dimon sees the&nbsp;stock price recovering strongly when it is realized more widely just how much the banks might&nbsp;benefit from negative rates and the erosion of cash held privately outside the banks.</div>
<div>&nbsp;</div>
<div>President Nixon&rsquo;s decision to unilaterally abolish the last remnants of a gold standard in 1971 heralded a nuclear age for international trade in which nations looked to gain advantage through serial debasement of their currencies and make up the difference with massive debt creation, unfettered by any link to gold. Similar to the nuclear strategy of mutually assured destruction, it set international trade on a course of mutually assured economic destruction.</div>
<div>&nbsp;</div>
<div>The size and scope of the political, economic and financial problems that now challenge the relative stability and tranquility of developed societies are unprecedented. Should the war on cash prove unsuccessful in its early stages, banks could be closed for long periods.</div>
<div>&nbsp;</div>
<div>Investors should be aware of such possibilities&nbsp;and consider whether to hold&nbsp;cash and precious metals prudently outside the banking system. Better to be even months too early than a second too late should we&nbsp;be left facing a bank&rsquo;s closed doors.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/AN-IbQJ2aNI" height="1" width="1" alt=""/>Tue, 23 Feb 2016 21:24:24 +0000europac admin17693 at http://www.europac.comhttp://www.europac.com/commentaries/escalating_war_cashThrough the Looking Glass on Rateshttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/vlVE-SwU-P0/through_looking_glass_rates
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<span class="date-display-single">Wednesday, February 10, 2016</span> </div>
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<div>On January 29<sup>th</sup>, Japan&rsquo;s central bank governor, Haruhiko Kuroda, announced that the Bank of Japan would introduce a Negative Interest Rate Policy, or NIRP, on bank reserve deposits held in excess of the minimum requisite. The European Central Bank, and central banks in Switzerland, Denmark and Sweden have already partially blazed this mysterious trail. The banks have done so in order to weaken their respective currencies and to light a fire under inflation. Swiss national bonds now carry negative rates out to maturities of eleven&nbsp;years, meaning investors must lock up funds for eleven&nbsp;years to receive even a small positive nominal return!</div>
<div>&nbsp;</div>
<div>There are economists and investors to whom&nbsp;these policies seem logical. After all, if low interest rates are good, wouldn&rsquo;t negative rates be better? Many have argued that the &ldquo;zero bound&rsquo;, or the point past which rates can go no lower, is simply the same type of archaic thinking that brought us the gold standard and moral hazard.&nbsp;</div>
<div>&nbsp;</div>
<div>These contemporary economists like to suggest that markets should become comfortable with negative rates and accept that they have an important role to play in the &ldquo;science&rdquo; of modern finance. But this analysis ignores the fundamental absurdity of the concept.</div>
<div>&nbsp;</div>
<div>Money has a time value. Funds available today are worth more to the owner than money available tomorrow. I would imagine that, if asked, 100% of people would choose to receive $10,000 today rather than the same sum a year from now. Many might&nbsp;even pay for the quicker delivery. Even if we allow for the unlikely possibility that real deflation exists, and that consumers are therefore making sensible decisions in deferring purchases, life is uncertain and consumers are impatient. That&rsquo;s why banks have always had to offer interest to savers to lock up their funds on account. Paying for the privilege of not spending one&rsquo;s money is a completely new development in human history, and one that I believe is at odds with fundamental concepts of economics and psychology.</div>
<div>&nbsp;</div>
<div>The ECB, as did the Bank of Japan (BoJ), cited economic stimulation as its main reason for negative rates. These sentiments were recently cited in a blog post by former Fed President Narayana Kocherlakota&nbsp;where he urged his former Fed colleagues to bring rates into negative territory. The logic is that people and businesses would refuse to pay to keep their money on deposit, and would instead withdraw those funds to spend and invest. However, zero percent interest rates do not appear to have had this affect. The money may, in fact, have been spent, but the growth never materialized. So will the dead horse we are beating suddenly get up if we beat it harder? Apparently so.</div>
<div>&nbsp;</div>
<div>Only eight days before taking the dramatic and highly debatable step to trigger negative rates, Bank of Japan President Haruhiko Kuroda had assured his Parliament in Tokyo that such a policy was not even being considered&nbsp;(Reuters, 1/21/16). But less than six days later, after attending the World Economic Forum in Davos, his position had changed. Did private discussions with world leaders in Davos convince him that a serious international recession and credit crisis would unfold unless all central bankers could fire all available weaponry?</div>
<div>&nbsp;</div>
<div>After the financial crisis of 2008, the U.S. Fed and the Bank of England (BoE) followed the lead of Japan to experiment with QE and ZIRP, even though those policies never delivered a recovery to the Japanese. The Fed and BoE unleashed stimulation with unprecedented vigor at home and then urged acceptance by other central banks. In essence, a huge global debt crisis was to be cured, or at least postponed, by even more international liquidity based on massive debt creation and the socialization of bank losses.</div>
<div>&nbsp;</div>
<div>Much of the massive synthetic liquidity created by the QE experiment was funneled into financial assets. This diverted business investment away from job-creating investment in plants, equipment and employment. Wages remained stagnant and consumer demand and GDP growth were disappointingly flat. According to data from the Bureau of Economic Analysis, expansion of real U.S. GDP growth between 2009 and 2015 averaged 1.4 percent per year or less than half the average rate of 3.5 percent experienced between 1930 and 2008.</div>
<div>Meanwhile, ZIRP has caused mal-investment along with an unhealthy reach by banks and investors for high yield, but riskier investments. This became most obvious in the high yield debt market,&nbsp;which now is being hit hard by the fall in oil prices.</div>
<div>&nbsp;</div>
<div>Negative interest rates mean that borrowers are paid to borrow. This serves as a powerful inducement for companies to borrow up to the hilt to buy other companies, to pay dividends that are unjustified by earnings levels and to invest in financial assets. Often this includes buying back their own corporate shares thereby increasing earnings per share, the share price and linked executive bonuses.</div>
<div>&nbsp;</div>
<div>For savers, negative rates discourage savings, stifling future business investment and consumer demand. However, central banks hope that discouraged savers will instead be lured into spending on consumer products and create short-term economic growth albeit at the price of future growth.</div>
<div>&nbsp;</div>
<div>Negative interest rates mean that lenders have to pay borrowers and that depositors have to pay banks to keep and use their money. One does not require a PhD in economics to recognize this as an unnatural distortion that will create more problems than it solves.</div>
<div>&nbsp;</div>
<div>If individual and business depositors draw down their balances, the deposit base of banks will fall as will the velocity of money circulation. This will not only discourage lending, but, through reverse leverage, cause bank liquidity problems. Should banks with loans to high-yield companies and emerging market nations, especially those hit by falling oil prices, see their loans become non-performing at the same time as deposits are falling, a potentially catastrophic banking crisis could threaten. Since the Financial Crisis of 2008, over $50 trillion dollars of new debt have been added globally to the levels that&nbsp;precipitated the banking crisis in the first place.</div>
<div>&nbsp;</div>
<div>Negative interest rates act effectively as a hidden tax funneled directly to banks. They are inherently unhealthy. Currently, they could indicate also a measure of unease&nbsp;among two of the four most powerful central banks. If so, that could well escalate. Depositors should be aware acutely of the hidden risks to their deposits.&nbsp;Already, nations with looming bank liquidity problems, such as Russia and many in Africa, are increasing their levels of bank deposit insurance to reduce potential political unrest.</div>
<div>&nbsp;</div>
<div>Readers know that we have felt for many months that the U.S. is far from ready for interest rate increases. We are of the opinion, now echoed by others, that the U.S. will see zero and possibly even negative interest rates before it experiences a one percent Fed rate. This does not bode well for our future.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/vlVE-SwU-P0" height="1" width="1" alt=""/>Wed, 10 Feb 2016 20:38:46 +0000europac admin17630 at http://www.europac.comhttp://www.europac.com/commentaries/through_looking_glass_ratesLifting Sanctions on Iran a Mixed Baghttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/oOqnmABKP7U/lifting_sanctions_iran_mixed_bag
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<span class="date-display-single">Monday, January 25, 2016</span> </div>
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<div>From a financial perspective, the New Year has been anything but happy. As of January 20<sup>th</sup>, the S&amp;P had fallen over 9% since the beginning of the year, to levels not seen since 2014,reflecting a loss of some $2 trillion in market value. Compounding matters was the 30%&nbsp;collapse in oil prices, which brought crude down to the lowest levels in 13 years. The New Year has also seen further evidence of recession in the U.S., which has appeared in&nbsp; a string of bad manufacturing&nbsp;service sector data.</div>
<div>&nbsp;</div>
<div>Into this volatile mix comes news that the conclusion of nuclear talks with Iran and its release of Western hostages has led to a lifting of sanctions on Iran. These developments allow Iran, a country of nearly 80 million people, to reintegrate into the world economy after years of sanctions stemming from its nuclear program. This process will have a dramatic, but, as yet, undetermined impact on the already fractured Middle East and on the increasingly connected global economy.</div>
<div>&nbsp;</div>
<div>The immediate effect will be that Iran&rsquo;s imports and exports will rise. As far as exports are concerned, that only really means one thing: Oil. Iran&rsquo;s oil exports are forecast to be able to add some 500,000 barrels a day, as Iran&rsquo;s deputy oil minister has been quoted, to an oil market already threatened seriously by oversupply. This new supply comes at a time when central banks are already &ldquo;struggling&rdquo; to keep inflation up. More oil on the market means lower prices, which means lower inflation. This could impel central banks around the world to continue to shower the markets with monetary stimulus.</div>
<div>&nbsp;</div>
<div>Measured against global production of 97 million barrels a day, as forecast by the IEA&nbsp;<em>Oil Market Report</em>, Iran&rsquo;s five hundred thousand barrels per day seems trivial at just over one half of one percent. Also, it will take time for Iran to bring its full production on stream. It won&rsquo;t be long before the Western energy companies jump into the market with both feet in order to bring Iran up to speed on all the new extraction techniques that the Iranians have missed as a result of sanctions. Just today, the&nbsp;Wall Street Journal announced that Schlumberger, the world&rsquo;s largest oil field operator, was looking to re-acquire its Iranian subsidiary that it was forced to divest when the sanctions were first imposed.</div>
<div>&nbsp;</div>
<div>However, as we know, prices for anything are set at the margin, and Iran&rsquo;s added production will increase the current OPEC surplus production of 1.6 million barrels&nbsp;by an additional 30 percent, at the least. In addition, recessionary forces may drive oil consumption down even&nbsp; further,&nbsp; placing additional weight on prices.</div>
<div>&nbsp;</div>
<div>Oil importing nations will benefit substantially from lower oil prices, as will consumers whose gasoline bills are plummeting. In some cases,&nbsp;U.S. gas prices are now well below $1 a gallon. According to the U.S. Energy Information Administration, Americans consumed a&nbsp;daily average of some 374 million gallons or 8.92 million barrels of gasoline in 2014. But this year&rsquo;s fall in oil and gas prices has not yet been reflected in a rapid increase in consumer spending.</div>
<div>&nbsp;</div>
<div>Lower oil prices could&nbsp;provide an economic shock to oil-producing nations in three important ways. First, national oil revenues would&nbsp;fall, forcing possible cuts in government spending. According to&nbsp;2014&nbsp;statistics from Alliance Bernstein, countries like Saudi Arabia, Iraq and Iran have the world&rsquo;s lowest production costs of around $20 a barrel. They would&nbsp;suffer far less than Russia, the U.S. and Canada,&nbsp;with production costs of above $80 a barrel.</div>
<div>&nbsp;</div>
<div>Second,&nbsp;and perhaps more importantly, is the effect of lower oil prices on corporate and national budgets, particularly those of oil producers that were formulated on estimates of far higher prices. Already, lower prices are hurting the high yield markets, causing&nbsp;concern&nbsp;of spreading contagion in debt markets. Oil prices that had been kept high for many years as a result of monetary stimulus sent false signals about future prices to the market and caused industry to make unneeded investments in production. Now that the bubble is bursting, the ensuing bankruptcies and write downs threaten a wider crisis.</div>
<div>&nbsp;</div>
<div>Finally, the budgets of many oil producing nations were formulated on the basis of higher oil revenues.&nbsp;Saudi Arabia&rsquo;s 2015 budget is believed to have been calculated on the basis of $98 oil and Russia&rsquo;s on $100 oil.&nbsp;The Venezuelan economy, already reeling from years of a horrific socialist government, will face additional headaches.&nbsp;</div>
<div>&nbsp;</div>
<div>Dramatic shortfalls in these projected oil revenues may not be matched easily by cuts in government spending without causing political unrest. However, many&nbsp;of the major oil producing nations have accumulated vast wealth in so-called sovereign wealth funds (Sovereign Wealth Fund Institute),&nbsp;which are government owned. These have diversified into many non-oil-related assets, including equities, particularly in U.S. markets. If these funds are forced to execute substantial&nbsp;sales in&nbsp;order to finance government budget deficits, international asset prices, including equities, can&nbsp;suffer.</div>
<div>&nbsp;</div>
<div>On the bright side, Iran can be expected to spend significant sums on imports from the major countries that agreed to the lifting of sanctions. There is no doubt that Iran&rsquo;s young population is hungry for the Western goods that it has&nbsp;been denied for so many years. However, care should be exercised to ensure that Iran does not increase the financing&nbsp;of international terror or acquire dangerous military imports at the same time, particularly those technologies associated with the delivery and accurate targeting of nuclear missiles.</div>
<div>&nbsp;</div>
<div>Although bringing Iran back&nbsp;into the family of nations may be a good idea in theory, for the reasons stated above, her return could not have come at a worse time. Another big question is what did the U.S. give away strategically in order to achieve this Pyrrhic victory? Sadly, only time will tell on that score. A wealthier Iran does not bode well for Saudi Arabia andprotectors of the Sunni-led status quo across the Muslim world.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/oOqnmABKP7U" height="1" width="1" alt=""/>Mon, 25 Jan 2016 13:45:42 +0000europac admin17528 at http://www.europac.comhttp://www.europac.com/commentaries/lifting_sanctions_iran_mixed_bagFeeling Abandoned, Saudi Arabia Ups the Antehttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/zHk4WLI9BrM/feeling_abandoned_saudi_arabia_ups_ante
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<span class="date-display-single">Tuesday, January 12, 2016</span> </div>
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<div>Last week a major diplomatic crisis developed between Saudi Arabia and Iran over the Saudi execution of&nbsp;Nimr al Nimr, a charismatic&nbsp; Shiite cleric and anti-Sunni political activist. Nimr&rsquo;s execution was an important political decision. On its face, it served to increase tensions in the developing struggle between Saudi Arabia and Iran for regional influence, a drama that has come to full boil as a result of decades of American policy mistakes. This Middle Eastern cold war, which divides Islam along Sunni/Shia sectarian lines, now threatens international oil supplies and regional peace.</div>
<div>&nbsp;</div>
<div>To understand Saudi reasoning requires a brief look at history. In 1902, Abdulaziz bin Abdulrahman bin Faisal al Saud (known widely as ibn Saud) left Kuwait with British money and covert support to retake the lands on the Arabian Peninsula that had formerly been ruled by his father.&nbsp;Successful, he was the first man since the Prophet Mohammed to reunite the Arabs of the peninsula (excepting those of the British protectorates) to form the Kingdom of Saudi Arabia in 1932. He was a warrior chieftain of great charisma and shrewdness.</div>
<div>&nbsp;</div>
<div>In 1945, ibn Saud met President Roosevelt in Egypt as he was returning from the Yalta Conference. Exuding charm, Roosevelt succeeded in convincing Saud that America, rather than Britain, was the only country&nbsp;that&nbsp;could guarantee the Kingdom&rsquo;s security.&nbsp;This encounter produced a most important treaty in which Saudi oil was traded for America&rsquo;s military muscle. This understanding formed the basis of Gulf War I, when President George H.W. Bush was shrewd enough to leave the tyrant Saddam Hussein in power to keep a lid on the simmering tensions between Sunni and Shiite Muslims and to hold Shiite Iran at bay. This was similar to President Truman leaving the Japanese Emperor on his Throne in 1945.</div>
<div>&nbsp;</div>
<div>Unfortunately, the second President Bush toppled Hussein to unleash mayhem in the area. President Obama compounded this catastrophic error by withdrawing unilaterally to leave his Sunni Arab allies politically and militarily exposed. In addition, Obama appeared to drop Saudi Arabia as a key regional ally in favor of Iran to conclude a nuclear deal that seemingly threatens the Sunnis, Israel and any future perceived enemies of Iran. As well as&nbsp;appearing weak and indecisive, Obama has made the U.S. appear disloyal to its allies and has fermented growing distrust, unrest and war-risk&nbsp;in the Middle East.</div>
<div>&nbsp;</div>
<div>I met Saudi Arabia&rsquo;s present King, Salman bin Abdulaziz al Saud (ibn Saud&rsquo;s sixth son by Queen Hussa al Sudairi) many years ago when he was governor of one of Saudi Arabia&rsquo;s provinces. My opinion of him, that is apparently shared by many in the diplomatic world, is that he is a very deliberative man, not one particularly inclined to rash actions. As a result, many are wondering why he would authorize the execution of the highly followed Shiite leader al Nimr, especially when his country is already in crisis as a result of falling oil revenues<strong>.</strong>&nbsp;Doubtless, the Saudis believe they have to act to protect themselves from a growing crisis that they are facing on their own.</div>
<div>&nbsp;</div>
<div>An emboldened Iran is exerting influence in the collapsing Syria, is &nbsp;fomenting revolt inside Saudi Arabia from the Kingdom&rsquo;s Shiite minority (of which Sheik al Nimr was a part), and is using surrogate states such Yemen to threaten Saudi borders. Given the U.S.&rsquo; prior withdrawal of support to Egyptian leader Hosni Mubarak during his &ldquo;Arab Spring&rdquo; crisis a few years ago, and the Obama Administrations courting of Tehran with its nuclear treaty, the Saudis are coming to believe that they can no longer rely on Washington.</div>
<div>&nbsp;</div>
<div>Another problem for Saudi Arabia is that the Sunni Jihadist movement, which first gave birth to Al Queada, and now ISIL, has some origins within Saudi Arabia. In addition to waging war against the &ldquo;infidels&rdquo; and the &ldquo;apostate&rdquo; Shiites, many jihadists have called for the toppling of the Royal family in Riyadh, which they see as a puppet of Washington.</div>
<div>&nbsp;</div>
<div>Third, as the sons of ibn Saud are ageing, there is a growing power struggle within the Royal family for succession.</div>
<div>&nbsp;</div>
<div>Facing these three major threats, King Salman appears to believe that firm deterrence must be forceful and exhibited publicly, with no exceptions.</div>
<div>&nbsp;</div>
<div>The radical cleric Nimr al Nimr was arrested initially in 2012 at the height of the &lsquo;Arab Spring&rsquo; and the Saudi military support of Bahrain&rsquo;s Sunni ruling family. Nimr was tried in 2014 and his sentence upheld by the Saudi Supreme Court in 2015. Given the historic context, Nimr&rsquo;s execution was to be expected sooner or later.</div>
<div>&nbsp;</div>
<div>It appears that King Salman weighed Nimr&rsquo;s execution carefully, even trying to reduce its profile by including it among those of 46 Sunni Al Qaeda suspects. He also needed time to secure a clear demonstration of&nbsp; support by his allied nations to build further upon the Saudi claim to be a regional player. Seeing a common threat, Bahrain, the UAE, Kuwait, and even Sudan fell in line, with Egypt in somewhat laggardly support. Meanwhile, however, the U.S. weighed in with criticism of the Saudis, likely weakening further any remaining faith her allies have in her support, even possibly outside the Middle East.</div>
<div>&nbsp;</div>
<div>Regardless, the message is clear.&nbsp;Insurrection will not be tolerated by Saudi Arabia especially if Shiite inspired. Meanwhile, the U.S. will bend over backwards to secure its potentially ill-fated nuclear deal with Iran.</div>
<div>&nbsp;</div>
<div>For investors, the outlook is for further turmoil in the Middle East with a growing risk to oil supplies and even of regional war. The problem with regional wars is that they have a risk of escalating, particularly now that Russia is playing a more active role in the area.</div>
<div>&nbsp;</div>
<div>Middle East Arabs are famously fond of gold. Realistic threats to their homelands may result in major&nbsp;acquisitions, particularly as it is rumored that the House of Saud has combined wealth of some $1.4 trillion!</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/zHk4WLI9BrM" height="1" width="1" alt=""/>Tue, 12 Jan 2016 19:06:16 +0000europac admin17464 at http://www.europac.comhttp://www.europac.com/commentaries/feeling_abandoned_saudi_arabia_ups_anteChina Takes a Big Step Forwardhttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/U6UAXqI5-xE/china_takes_big_step_forward
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<span class="date-display-single">Thursday, December 10, 2015</span> </div>
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<div>On November 30th&nbsp;the International Monetary Fund (IMF) announced that it would admit China&rsquo;s Renminbi currency, commonly known as the Yuan, to the select basket of reserve currencies that make up its Special Drawing Rights (SDR&rsquo;s). Having been stalled by U.S. influence for many years, the long-awaited IMF decision acknowledges the massive transfer of financial power from the old West to the new East. The move heralds an era of potentially great change with global implications for politics, economics and investments.</div>
<div>&nbsp;
<div>At the end of WWII, the U.S. and British governments persuaded the participants of the Breton Woods Agreement to accept the U.S. dollar as the world&rsquo;s international reserve currency and to simultaneously create the World Bank and the IMF. The aim was to establish a stable, global financial system and to encourage the recovery of international trade. In particular, the role of the IMF was to ensure a smooth flow of foreign exchange and to lend money, when needed, to sovereign nations&nbsp;experiencing temporary balance of payments problems.</div>
<div>&nbsp;</div>
<div>For much of the postwar years, the structure succeeded. In the first decades following the War,&nbsp;the value of world trade grew so fast that the demand for currency threatened to outstrip the available amounts of gold and U.S. dollars. The IMF responded in 1969 by creating the Strategic Drawing Rights (SDR) as a supplementary international reserve asset for central banks. Each SDR was valued at 0.888671 grams of fine gold equivalent to one U.S. dollar. (Fact Sheet, SDR, IMF 11/30/15)</div>
<div>&nbsp;</div>
<div>When the fixed exchange rate system established by Bretton Woods collapsed in the early 1970s and currencies were exchanged at floating rates, gold was dropped from the SDR&rsquo;s backing and replaced by a combination of the most widely-traded currencies, which became known as the &lsquo;SDR basket&rsquo;.</div>
<div>&nbsp;</div>
<div>Most recently, the basket was comprised of five international reserve currencies, including 41.90 percent U.S. dollars, 37.4 percent euros, 11.3 percent pound sterling and 9.4 percent yen. (Fact Sheet, SDR, IMF 11/30/15)</div>
<div>&nbsp;</div>
<div>For much of the past ten years, China has sought to gain international recognition commensurate with her growing economic and political power. China lobbied hard for the inclusion of its Renminbi currency in the prestigious SDR basket. However, the U.S. used its 17 percent vote, along with its political influence among allies, to block China on the grounds that its reserves remained undisclosed and its currency was not freely convertible.</div>
<div>&nbsp;</div>
<div>In response,&nbsp;China began to liberalize trading in its currency to allow foreign central banks to trade in its government bonds and to begin disclosing its hidden reserves. This was a major political step for the secretive Communist government and a crucial test of President Xi Jinping&rsquo;s efforts to transform the Chinese economy.</div>
<div>&nbsp;</div>
<div>These moves were sufficient to gain allies for China in the IMF and admittance to the SDR basket. Referring to China&rsquo;s inclusion, Christine Lagarde, Managing Director of the IMF, has stated,&nbsp;&ldquo;...It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China&rsquo;s monetary and financial systems...The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which,&nbsp;in turn will support the growth and stability of China and the global economy.&rdquo;(IMFSurvey Magazine, 12/1/15)</div>
<div>&nbsp;</div>
<div>The new SDR basket will comprise 41.73 percent U.S. dollars, 30.93 percent euros, 10.92 percent Renminbi, 8.33 percent yen and 8.09 percent sterling (Fact Sheet, SDR, IMF 11/30/15). The percentages reflect just an initial recognition of the financial power accumulated in the new East.</div>
<div>Furthermore, China&rsquo;s Renminbi is the first currency of a non-U.S. ally to be admitted to the SDR basket. That alone heralds a new era for monetary affairs. On a parallel track, China has recently succeeded in launching the Asian Infrastructure Investment Bank, a Chinese led multi-billion dollar investment bank that would finance roads, bridges, and other infrastructure projects in the poorer regions of Asia. The bank was widely viewed as a means to counter America&rsquo;s influence in Asia. And while Washington opposed the project, Beijing managed to line up the support of 57 countries, including such key U.S. allies as Britain, Germany, Australia, and South Korea.</div>
<div>&nbsp;</div>
<div>It is no secret that China wishes to become first among equals as a superpower. As part of this strategy, it is not unrealistic to assume that China&rsquo;s endgame will be to knock the U.S. dollar off its perch as the International Reserve Currency.&nbsp;</div>
<div>&nbsp;</div>
<div>If successful, this could prove a devastating blow to the U.S. As the International Reserve Currency, almost all global commodities are traded in dollars. This confers upon the Federal Reserve the unique privileges of setting the stage for major international interest rates to suit U.S. economic cycles and of creating seemingly unlimited amounts of fiat money from thin air. Rather than yielding meekly to U.S. wishes, China can be expected gradually, but inexorably, to challenge the dollar&rsquo;s Reserve status and today&rsquo;s omnipotent influence of the Federal Reserve. It could herald also a revival of the role of precious metals in the global monetary system.</div>
<div>&nbsp;</div>
<div>Even now, with its potential inclusion in the SDR basket, central banks and corporate treasurers will be considering further currency diversification into the Chinese Renminbi. Most likely, this rebalancing will involve&nbsp;selling of U.S. dollars and euros to buy Renminbi. This will be done both to balance risk and because, as China&rsquo;s economic might grows and the dollar&rsquo;s Reserve status is challenged, it is increasingly likely that more commodities will be priced in Renminbi.</div>
<div>&nbsp;</div>
<div>It is unlikely that China will wish to upset international trade, and its own export machine, at a time of looming recession. However, over the long term, China may&nbsp;be expected to use its new found financial influence to erode the power of the U.S. dollar. As the world&rsquo;s largest producer, and rumored already to be the world&rsquo;s largest holder of gold, China may&nbsp;push progressively for the reintroduction of a gold link for the SDR, and eventually for its Renminbi, to boost international support for its acceptance as an increasingly credible substitute for the dollar as the world&rsquo;s International Reserve.</div>
<div>&nbsp;</div>
<div>Should this happen,&nbsp;perhaps the most important floor supporting the dollar would evaporate,&nbsp;rendering the Federal Reserve unable to continue creating money at will and catapulting U.S. interest rates to levels that potentially could threaten a massive debt and even a currency crisis. Given the unprecedented $18.8 trillion level of U.S. Treasury debt&nbsp;and estimated $100 trillion-plus level of unfunded U.S. Government obligations, according to usdebtclock.org, this would be extremely damaging for the dollar and potentially to the U.S. economy.</div>
<div>&nbsp;</div>
<div>The risks of devastation to world trade make it likely that this strategy will take considerable time to become manifest. In the meantime, China may&nbsp;be expected to use the implied threat judiciously to twist the arms of powerful nations.</div>
<div>&nbsp;</div>
<div>Despite potentially serious domestic political problems and massive internal debt levels of some $28 trillion, according to McKinsey &amp; Co., China has gained its place in the SDR basket. Only time will tell precisely how China will use this new-found influence. But it could spell the beginning of the end for America&rsquo;s monetary and even military dominance. Such developments&nbsp;could result in a revival of precious metals in monetary affairs. As debt then would become revalued rather than devalued by inflation, such a move could have considerable&nbsp;economic and political implications for national and private debtors in the U.S., Europe and the entire world.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/U6UAXqI5-xE" height="1" width="1" alt=""/>Thu, 10 Dec 2015 17:53:56 +0000europac admin17298 at http://www.europac.comhttp://www.europac.com/commentaries/china_takes_big_step_forwardEuropean Union Challenged from Right and Lefthttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/nOIY7Tvyc_A/european_union_challenged_right_and_left
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<span class="date-display-single">Wednesday, November 18, 2015</span> </div>
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<div>The heinous ISIS attack in Paris is a game changer in Europe. In addition to the horrific amount of individual casualties, the attack has also&nbsp;threatened&nbsp;severe damage to the long term survivability of the European Union as a political entity. Based on the unpopularity and unfeasibility of immigration controls under the EU&#39;s Schengen Plan, the events have opened up the Union to renewed attacks from the right, just as its support from the left is crumbling as a result of opposition to EU-mandated fiscal austerity. This two-front onslaught may be too much for the Union to endure.</div>
<div>&nbsp;
<div>Over the decades,&nbsp;Western Europeans had come to rely on the power of the United States to shield them from the chaos of the East. But it has become abundantly clear that America, particularly under President Obama, is not up to the task. Obama&#39;s now infamous claim that ISIS was merely a &quot;JV Team&quot; combined with his enduring lassitude in dealing head on with the growing threat of a radical Islamist proto-state in the heart of the Middle East has forced Europeans to consider taking the reins of their own defense.</div>
<div>&nbsp;</div>
<div>Unlike the lone wolf attacks in Boston and underwear bombers on planes in the United States, the Paris attack last week (as well as the Charlie Hebdo attack earlier this year) was highly sophisticated. (The explosives used in the attack, while simple to produce, are extremely difficult to handle once they are in their final form. The fact that its use was coordinated in simultaneous&nbsp;attacks&nbsp;while evading detection by anti-terrorist signals monitoring demonstrates an alarmingly high level of planning and control.) Initial evidence suggests the strategy was conceived in Syria, planned in Belgium and executed in France, reinforcing the idea that a high degree of transnational reach was available to the terrorists.</div>
<div>&nbsp;</div>
<div>In this environment, EU border control has become an issue of vital security. But the border control regulations that are part of the fiber of the European experiment are simply inadequate to stop the free flow of terrorists, both into the EU from abroad, and within the EU. Germany&#39;s stated goal of accepting 800,000 refugees from Syria this year, a policy that throws the door wide open for the immigration of potential terrorists, cannot coexist with the&nbsp;Continent&#39;s growing concern about Islamist terror attacks.</div>
<div>&nbsp;</div>
<div>In France, President Francois Hollande appears to have wrested from a hesitant President Obama the leadership of a frustrated West. France has now taken the lead in airstrikes against ISIS positions and has shown a greater willingness to work with Russia to do so. However, with regional elections in three weeks, Hollande faces a renewed challenge from Marine Le Pen, leader of the right wing&nbsp;National&nbsp;Front&nbsp;(NF)&nbsp;party. Despite facing charges for an anti-Islamic remark, Le Pen stands to make large electoral gains based on her Eurosceptic anti-immigration stance. The FN has been gaining traction for years, and last week&#39;s attacks could provide them with the fuel to become the most powerful party in France.</div>
<div>&nbsp;</div>
<div>In particular, it is surprising how the&nbsp;NF&nbsp;has also taken up some of the anti-EU sentiment usually reserved to the left wing. Le Pen has called for greater government welfare spending, austerity reductions, and increased trade protectionism, causes that have been championed by the left, especially in Southern Europe.</div>
<div>&nbsp;</div>
<div>Last week, Portugal&#39;s center-right minority government led by Prime Minister Pedro Passos Coelho was forced out of office after just two weeks. The prospect of continued EU-mandated austerity forced Coelho&#39;s Socialist partners to leave the coalition to join forces with the Communist and Green parties.</div>
<div>&nbsp;</div>
<div>Germany, Europe&#39;s economic engine long-admired for efficiency, high productivity and sound monetary views, recently has experienced a major internal political shock. Chancellor Angela Merkel emerged last year as the most powerful woman in the world and the undisputed leader of the 503 million people of the European Union, the world&#39;s third largest population after China and India. However, Merkel appears to have miscalculated massively with her pledge to accept so many refugees from the war-ravaged Middle East. In response to horrified public opinion, her center-right coalition has appeared to break political ranks,&nbsp;giving the impression even of chaos within Merkel&#39;s administration.</div>
<div>&nbsp;</div>
<div>The immigration situation is so bad that it has encouraged discussion of a possible early German election. The prospect has been raised that Finance Minister Wolfgang Schaeuble, a very tough moneyman keen on austerity, might re-challenge Merkel for the leadership of their Christian Democratic Union party. Replacement of the pro-EU Angela Merkel by Wolfgang Schaeuble likely would increase austerity pressures and ignite further strong left wing feelings against the EU. Austerity measures in Portugal and Greece are exposing already increasingly deep-seated Eurosceptic feelings.</div>
<div>&nbsp;</div>
<div>Further, the planned December EU summit meeting faces increasing opposition to the further integration of a single state. Increased German focus on internal politics will divert energy from forging a closer EU. Without German support, the Eurozone&nbsp;may&nbsp;quickly become a thing of the past.</div>
<div>&nbsp;</div>
<div>Rising Eurosceptic feelings and voting power are storm clouds for international investors. Increased doubts about EU solidarity could threaten even the perceived future of the euro, now the world&#39;s second currency. Signs of weakening EU cohesion&nbsp;could affect the value of many investments within the EU and around the world. In particular, absent their ECB subsidy, the prices of sovereign bonds of highly indebted periphery EU nations could come under intense pressure and thereby cause liquidity problems for EU banks.</div>
<div>&nbsp;</div>
<div>Even before the attacks in Paris, the world appeared to be entering a period of slow growth, with Japan, the Eurozone, and even the United States flirting with recession. Given the slowing trajectory economy,&nbsp;it&nbsp;is logical to suggest that the attacks in Paris could help pave the way for even greater activism from The Bank of Japan, The Federal Reserve, and&nbsp;the&nbsp;ECB. The monetary authorities&nbsp;would&nbsp;surely seek to&nbsp;help&nbsp;bolster economies that are being rocked by fiscal, political and strategic crises.&nbsp;In other words, the era of permanent global stimulus&nbsp;may&nbsp;continue for the foreseeable future.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/nOIY7Tvyc_A" height="1" width="1" alt=""/>Tue, 17 Nov 2015 22:45:18 +0000europac admin17150 at http://www.europac.comhttp://www.europac.com/commentaries/european_union_challenged_right_and_leftReshuffling the Deck in the Mideasthttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/KkoNraDFcEM/reshuffling_deck_mideast
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<span class="date-display-single">Thursday, October 22, 2015</span> </div>
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<div>The U.S. presence in the Middle East, which for years provided some control over one of the world&rsquo;s most volatile regions, appears to have dissolved into chaos. By removing Saddam Hussein from power, the U.S. removed his tyrannical but stabilizing hand from the powder keg that always existed in the poorly designed nation state of Iraq. Rather than attempting to repair the damage, President Obama appears intent on leaving what he terms &ldquo;a quagmire.&rdquo; Predictably, chaos has emerged, not just in Iraq, but in Syria as well. The rapidly changing political landscape is pushing major regional players like Turkey, Egypt and Saudi Arabia to drastically reshuffle their assumptions and allegiances.</div>
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<div>It is said that nature abhors a vacuum and that history is broadly the history of leaders. The vacuum that is the Middle East is now drawing in Vladimir Putin, one of the boldest characters on the world stage. By drastically raising its military presence in the region, Russia is taking advantage of political confusion and paralysis in the West to create a Middle East that may be more supportive of her interests. While the focus now is on Syria, highlighted by the surprise visit of Bashir al Assad to Moscow, the real target of Russia&rsquo;s gambit may be Saudi Arabia, which is now incurring massive military expenditures as a result of fighting in&nbsp;Yemen and by proxy in Syria. Like Russia, Saudi Arabia is being hurt by low oil prices. Given both country&rsquo;s dependency on the price of crude oil, they may have more in common than many may expect.</div>
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<div>Russia&rsquo;s finances have recently been devastated by the drop in crude prices and by the U.S.-led NATO sanctions imposed for the Ukraine incursion.. To maintain its viability, Russia must seek to push up the price of oil by any means at her disposal. Coordinated production agreements between Russia and Saudi Arabia could offer Russia that possibility. However, this would not be in America&rsquo;s interest. Rising oil prices would add to inflation pressures and put more pressure on the Fed to raise rates. This is an outcome which should be raising eyebrows around the world, but sadly no one seems to be considering the possibility.</div>
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<div>As a high cost producer, Russia can&rsquo;t survive in a long term low price environment. Traditionally, Saudi Arabia has agreed to align its own oil production policies to the broad strategic interests of the United States in exchange for U.S. protection against its regional rivals, in particular the Shiite state of Iran. But the Obama administration&rsquo;s recent courtship of Iran (through its nuclear treaty), its failure to support allies in Egypt, and its hesitancy to follow through with threats against Syria, might be encouraging the Kingdom to seek newer, more reliable allies.</div>
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<div>Still a military superpower, Russia appears set, under President Putin, to challenge the U.S. as part of a strategy to restore its position as a major global player. Given America&rsquo;s vastly superior financial muscle, the contest is only possible given Putin&rsquo;s greater mastery of power politics and the realities of global statecraft.&nbsp;Obama&rsquo;s foreign policies reveal a strong leftist leaning, a stunning lack of military understanding, and a na&iuml;ve belief in the benign power of organized democracy.</div>
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<div>Putin could scarcely be more different. Rather than organizing community activists in Chicago, Putin cut his teeth as head of the KGB in former East Germany. Subsequently, his political rise was fast, illustrating a clear ability to work within power politics. As opposed to Obama&rsquo;s discomfort with America&rsquo;s military history, Putin is a patriotic Russian who was mortified to witness the fall of the Soviet Union. He has proven to be a very calculating opportunist bent on restoring Russia&rsquo;s sphere of influence in the Crimea, the Ukraine and now the Middle East. Putin has shown that he is not afraid to stand up to the United States and its allies. This has increased his domestic support and international standing.</div>
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<div>To support its ally in Syria, Russia is now deploying ground troops, including tanks and heavy artillery. Clearly, Putin is thinking in regional terms. With an airbase in Syria, his fighter-bombers can project power into and throughout the region, an opportunity that it has not enjoyed for decades. Thus far Russian forces have not been used to destroy ISIS, as the U.S. would have hoped, but to directly support the Assad regime. Sometimes this means the Russians are going after factions directly supported by the U.S., setting up a dangerous proxy war between the superpowers.</div>
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<div>As part of his efforts to move closer to Iran, Obama appears to have put aside old, well-established relationships with Israel and Saudi Arabia. This has caused resentment and a feeling that the U.S. can no longer be trusted as a reliable ally.</div>
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<div>According to an article in Brookings, Saudi Crown Prince and Defense Minister, Prince Mohammed bin Salman&nbsp;visited President Putin in St. Petersburg in June 2015. The most trusted son of the Saudi King, Prince Mohammed was accompanied by the Saudi Foreign Minister, Adel Al Jubeir. Perhaps most interestingly, the delegation included the Saudi Minister of Petroleum, Ali Al Naimi, together with some senior military and intelligence officials. Apparently the meetings went well, with reciprocal State Visit invitations offered by both parties. Reuters reported that, on October 3, 2015, Russian Energy Minister Alexander Novak said in referring to the possibility of Russia&rsquo;s preparedness to meet with OPEC and non-OPEC oil producers that, &ldquo;If such consultations are to happen we are ready to take part.&rdquo;</div>
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<div>Low oil prices have kept inflation down, allowing the Fed to continue stalling on a normalization of U.S. interest rates. A rise in oil prices likely would result in increased inflation. This would remove a crucial public excuse, enabling the Fed to justify zero interest rates.</div>
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<div>In this column we have argued for many months, even years, that the Fed will not normalize interest rates, other than a possible token 0.25 or even 0.125 percent, until forced to do so by market forces. A higher oil price leading to inflation may provide such pressure if not to the Fed directly, then to international bond markets. A market-triggered interest rate increase likely would do&nbsp;damage to the credibility of the Fed, the international monetary system and to the current prices of financial assets standing at inflated prices, including bonds, equities and, over the short-term, real estate.</div>
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<div>As a result, the chess match now unfolding in the Middle East, may not be as insulated from the American economy as Wall Street would like the investing public to believe. If Saudi Arabia drifts out of America&rsquo;s orbit, our ability to avoid financial collapse will be that much more difficult.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/KkoNraDFcEM" height="1" width="1" alt=""/>Thu, 22 Oct 2015 15:47:09 +0000europac admin16999 at http://www.europac.comhttp://www.europac.com/commentaries/reshuffling_deck_mideastImmigration: A Political and Economic Issuehttp://feedproxy.google.com/~r/JohnBrownesMarketCommentary/~3/puj97wuMbOo/immigration_political_and_economic_issue
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<div style="border-bottom:1px solid #ccc;margin-bottom:10px;padding-bottom:10px;color:#777;font-style:italic;">Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.</div> </div>
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By:&nbsp;</div>
John Browne </div>
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<span class="date-display-single">Tuesday, September 8, 2015</span> </div>
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<div>Donald Trump has successfully placed immigration at the center of the U.S. Presidential election. But while the issue is still largely a debating point in the United States, it has quickly and violently become a life and death issue for the European Union, which is in the midst of the most significant immigration and refugee crisis since the Second World War.</div>
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<div>The BBC reports, &quot;More than 300,000 migrants have risked their lives trying to cross the Mediterranean to Europe so far this year, according to the UN. This compares with 219,000 for the whole of 2014.&quot; (8/28/15)&nbsp;By including refugees, AFP News Agency puts the figure even higher, stating &quot;Nearly 340,000 refugees and migrants illegally crossed the border into Europe from January to July 2015, according to the EU&#39;s border agency Frontex. The figure compares to 280,000 for the whole of 2014.&quot; (8/31/15)&nbsp;This promises a drastic increase for all of 2015.</div>
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<div>The spike in immigration in Europe has its roots in general disintegration in the Middle East and North Africa, which in itself is a function of flawed Western interventionism and botched foreign policy. With war tensions in the Middle East and the rise of ISIS, the suffering of the local civilians has been appalling. With the political and social institutions collapsing in failed states such as Syria, Iraq, Afghanistan, Somalia, and Libya, those leaving likely see no possibility of returning. So, unlike in years past, they are not willing to stop in refugee camps to await developments in their home countries. They have made the decision to go all the way to Europe, and they are willing to risk all to get there.</div>
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<div>The waves of immigrants, both refugees and migrants, tend to enter the southern periphery countries including Greece, Italy and Spain in addition to new eastern EU member countries like Hungary. Immigrants perceive these EU countries as close with porous borders. Furthermore, these periphery countries condone lax border controls because they understand that these immigrants have no wish to settle in their countries. Rather, the migrants are intent on moving out fast, under the EU&#39;s Schengen Plan, into the richer northern countries, like Germany and the UK, which also offer more generous social benefits to newly arrived immigrants.</div>
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<div>Notably, excluding the UK and Ireland, which were granted an opt out, the 26 remaining nations of the EU have accepted membership of the Schengen Area. Membership requires each nation to abolish all passport and other types of control at their common intra-EU borders. Thus, once&nbsp; migrants have entered the EU through the relatively porous southern borders, they can move at will, like any EU citizen, to any member country, with the exception of the UK and Ireland. Naturally, migrants head to those relatively rich countries. This strains the availability of housing, health, education, social security and jobs greatly to the cost and disadvantage of legitimate local citizens.</div>
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<div>According to Eurostat Data, as early as 2009, Germany had 7.2 million foreign citizens. The Wall Street Journal reported that Germany has had to nearly double its 2015 forecast of migrants from 450,000 to 800,000 (8/19/15), or almost one percent of its population. These are very serious numbers. Further, on August 24th, BloombergBusiness reported that recently a German town was shaken by three days of anti-immigrant riots. Under this pressure, Germany&#39;s Chancellor Merkel, the most powerful politician in Europe, has called for more even sharing of the immigrant load by fellow EU members. This will send shudders down the backs of UK ministers.</div>
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<div>British citizens prevented their governments from joining the EU&#39;s common currency, the euro. Nevertheless, Britain was lumbered with much of the Greek and Eurozone rescue packages through its ill-advised membership of the EU. Now, it appears that Merkel is trying to &quot;share the burden&quot; of mass migration by pushing the UK into accepting hundreds of thousands more migrants under the Schengen Plan of which, again, it is not a member. British Prime Minister David Cameron has done just that by offering asylum to &quot;thousands&quot; of refugees.</div>
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<div>Even before the current crisis, the UK had accepted huge numbers of migrants from the EU&#39;s new eastern members,&nbsp;like Poland. In just the past three years, the British government,&nbsp;according to its Migration Statistics Quarterly Report of August,&nbsp;has&nbsp;nearly&nbsp;doubled its immigration from&nbsp;an estimated 177,000&nbsp;in&nbsp;March&nbsp;2012&nbsp;to 330,000 in&nbsp;&nbsp;March&nbsp;2015.</div>
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<div>Immigration is a highly emotional subject in the UK that was forced to accept massive immigration first from its former empire, then from within the EU and now from the Middle East. Doubtless excessive immigration will be used to considerable effect by Britain&#39;s third party, the Eurosceptic UK Independence Party (UKIP), in the 2016 in/out EU referendum. Already, the charismatic UKIP party leader, Nigel Farage, has said that only by leaving the EU can we have a sensible Australian-style points system to control immigration.&nbsp;Considered by international bodies as fair, the Australian model is politically acceptable and could play a decisive role in the UK&#39;s in/out referendum on continued EU membership.</div>
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<div>The cost of the current mass migration into the EU will strain national finances and social and religious differences. Already, the British people are deeply conscious of these potential problems. If, as a result of the current crisis, the UK were to vote to leave the EU, it could have a shattering effect on the world and foreign exchange markets. Also, it could threaten seriously the continued cohesion of both the EU and its currency, the euro, now the world&#39;s second largest.</div>
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<div>Clearly this situation presents the European Union with a crisis that is perhaps more significant than its debt crisis, but far more tangible, and ultimately, I believe, more solvable. But as in the past, the crisis will once again highlight the political paralysis and ineptitude of EU leaders. If unresolved, I believe the crisis will lead to a faster downfall of the entire European experiment.</div>
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</div><img src="http://feeds.feedburner.com/~r/JohnBrownesMarketCommentary/~4/puj97wuMbOo" height="1" width="1" alt=""/>Tue, 08 Sep 2015 19:45:46 +0000europac admin16753 at http://www.europac.comhttp://www.europac.com/commentaries/immigration_political_and_economic_issue